As an investor in UK shares, I follow news coming out of the London Stock Exchange (LSE) to try and get wind of opportunities and avoid potential risks.
One data point I find useful is whether hedge fund managers are bullish or bearish on stocks I’m researching. After all, professional money managers have a wealth of experience, knowledge and resources that I could only dream of wielding.
Short-selling is a way for investors to profit from stock prices falling. To short sell, a trader borrows shares and sells them on the market, with the aim of buying them back later for less.
The Financial Conduct Authority (FCA) mandates that funds disclose their short positions if they reach a certain threshold. To be specific, if an investor’s net short position is equal to or greater than 0.5% of the issued share capital of the company concerned, they must report it.
The table below adds all of those individual reports together to give a list of the 20 most shorted companies on the LSE this month.
|NAME OF SHARE ISSUER||Net short position|
|DIRECT LINE INSURANCE GROUP||3.45|
|PRIMARY HEALTH PROPERTIES||2.71|
Short and sour
Should I steer clear of these stocks?
Not necessarily. While a company might be going through a bumpy patch right now, that doesn’t mean it won’t see better times in the long term.
Focusing on just the most-shorted company on the LSE, ITM Power (LSE:ITM), I see some reasons for positivity.
Hydrogen hype goes Hindenburg?
ITM Power designs and manufactures hydrogen energy solutions for a variety of industries.
The start-up’s valuation has dropped from £3.5bn in 2021 to £600m due to delivery delays for its flagship product, a 24-megawatt electrolyser.
Electrolysers are devices that use electricity to break down water molecules into hydrogen and oxygen through a process called electrolysis. The hydrogen produced can be used as a clean fuel source.
The company’s technology doesn’t seem to be in doubt. It has already successfully developed products and secured orders from customers including industrial gas giant Linde, as well as Shell and RWE.
Its new boss, Dennis Schulz, seems determined to turn the ship around. Schulz said he would get the company to profitability within five years. His 12-month recovery plan involves cutting a quarter of the company’s headcount, trimming its product range, and improving its engineering processes.
Still, ITM Power’s financial woes can’t be swept under the rug. It has already burnt through around half of the £500m it raised during peak optimism around hydrogen-related stocks in 2021. To make matters worse, its annual revenue is a fairly puny £2m, meaning further equity financing and dilution of shareholders could be around the corner.
To buy or not to buy?
I currently have a position in Linde, ITM Power’s biggest investor. This provides me with some exposure to the firm’s technologies, while having the safety offered by Linde’s strong balance sheet.
As for the remaining 19 highly shorted companies, Primary Health Properties is on my watchlist, and I’ll re-visit the company when I next have spare cash to invest. I’m avoiding the rest!
The post 20 UK shares that fund managers think will go down in flames! appeared first on The Motley Fool UK.
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Mark Tovey has positions in Linde Plc. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.