Should you copy hedge funds and sell Debenhams?
Short sellers called it right with Carillion, so . . .
VULTURE investors have made a £ 1.2bn bet against some of the best-known High Street retailers.
Hedge funds are tipping the share prices of Debenhams, Sainsbury’s and pet supplies chain Pets At Home to plummet as the High Street continues its struggle against online competition.
They can make hundreds of millions – or even billions – of pounds by betting that the businesses’ share prices will fall.
So- called short- sellers walked away with more than £200m betting on the demise of construction giant Carillion. They did so by carefully analysing details in the firm’s annual report and spotting warning signs that ministers seem to have missed.
Now they have turned their attention to the High Street. So have they seen something others haven’t and should you heed this warning?
Russ Mould, of broker AJ Bell, says: ‘You’ve always got to be aware of what they are saying, because they won’t take that decision and risk lightly, but it doesn’t mean they’re always right.’
Debenhams is Britain’s most shorted stock, highlighting the troubles the 239-year-old department store chain is facing – and rival Marks & Spencer is one of the top ten. AT
the start of January Debenhams issued a profit warning following poor Christmas sales. Analysts blamed poor product pricing, badly designed stores and a failure by the retailer’s senior management to differentiate the business from its competitors.
The news caused a sharp fall in the share price, which is down 70pc in the past five years.
In a bid to reassure investors, Debenhams chief executive Sergio Bucher this month announced a £10m cost saving plan – but experts say that’s not enough. This month broker Liberum Capital reaffirmed its ‘Sell’ rating for Debenhams while Peel Hunt went from ‘Hold’ to ‘Sell’. Ben Yearsley of adviser Shore Financial Planning says: ‘I just can’t see where Debenhams fits into today’s market. If you’ve got shares in them it’s possibly time to get out.’
Hedge funds are shorting more than 10pc of Sainsbury’s shares. Faced with threats on multiple fronts from discount supermarkets, a recovering Tesco and Amazon’s entry into the grocery markets, the vultures smell blood.
Over the past year investors have had a bumpy ride with the supermarket’s share price hitting a 12-month high of 281.7p before sliding as low as 224.8p.
But it has recovered – closing up 0.12pc, or 0.3p, at 258p – a week after announcing decent Christmas trading figures which revealed a 1pc boost in clothing sales and 2.3pc rise for groceries.
Sainsbury’s, which serves more than 22m shoppers a week, has also ramped up its same-day grocery delivery service, which is available to 38pc of households.
However, its general merchannames dise sales which includes Argos, the catalogue retailer, posted a disappointing 1.4pc drop in sales, prompting speculation it was dealing with the threat of Amazon less well than its parent.
While the results were mixed, broker opinion suggests it’s too early to make a call on Sainsbury’s, with four rating the firm ‘Neutral’ and only one firm each urging investors to ‘Strongly Sell’ or ‘Strongly Buy’.
Investors in the pet supplies chain Pets At Home have taken a hammering over the past two and a half years, seeing the value of their investments fall by 43pc. However, the firm’s share price is up 10pc on its low of 160p in November. Like many other on the High Street, it faces intense competition from online rivals which are able to sell their products more cheaply.
A recent round of price slashing on everything from dog leads to pet food has boosted sales – but at the expense of profit. The firm’s earnings were up 6pc to £468m, although profit slid more than 11pc to £41m.
Despite the dip, two brokers who have published outlook notes on Pets At Home in the past six months have given it a ‘Strong Buy’ rating. Another said it was ‘Neutral’, while another issued a ‘Strong Sell’ rating.
Mould added: ‘Like many companies, it’s facing stiff competition from online but it has taken steps in the short-term to address that by cutting its prices.’