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I like to keep an eye on short selling data when creating a list of FTSE 100 shares I want to buy. It shows the stocks that hedge funds expect will plunge in value, and provide an additional indicator as to which companies I should potentially avoid.
The wealth of experience and strong track records that many hedge fund managers have make their opinions worth considering. However, they don’t always get it right, and long-term investors have often made a packet by buying heavily-shorted businesses.
Here are two of the FTSE stocks that are most hated by hedge funds right now. Should I buy them or avoid them like the plague?
According to shorttracker.co.uk, DIY business Kingfisher Group (LSE:KGF) is the most-shorted stock on the FTSE 100 right now. Some 4.5% of its shares are currently shorted.
The retailer has several major problems to tackle. A cooling housing market combined with a general cost-of-living crisis, is putting sales under extreme pressure. Like-for-like sales in UK and Ireland dropped 0.8% between January and April.
Revenues are also tanking in its key French market (down 4.1% in the quarter). And the company has a colossal amount of debt on its balance sheet. Net debt grew to £2.2bn as of March, up £700m year on year.
In its favour, Kingfisher’s B&Q and Screwfix banners have exceptional brand power. The former is in fact one of the go-to places for people seeking a box of screws or a tin of paint.
But the company still faces significant competitive pressures from industry specialists and general retailers, most notably US internet heavyweight Amazon. For this reason — along with those above — I’d rather buy other British shares today.
Grocery business J Sainsbury (LSE:SBRY) is the third-most shorted FTSE 100 share at the moment, with short interest sitting at 3.2%.
Some investors love supermarkets. We all need to eat, and we need to do it all the time. This gives food retailers exceptional revenues visibility during good times and bad.
The trouble is that high competition means these companies operate on wafer-thin profit margins. So their ability to grow profits is massively weakened, especially when costs head through the roof. J Sainsbury’s underlying operating margin (excluding fuel) slumped to 2.99% in the year to March.
The problem for Sainsbury’s is that it’s losing share to discounters Aldi and Lidl and to middle-ground rivals like Tesco. So its only weapon is to keep slashing prices to keep attracting customers, putting earnings on the back foot.
As the value chains expand their store estates the problem is likely to worsen. Until the company concocts a better plan to take on the competition I’ll continue to avoid it at all costs.
Recent market volatility has created an abundance of FTSE 100 bargain shares I’d rather buy this August.