Before investing, I think it's a good idea to check which companies are attracting the most interest from short-sellers. For newer readers of The Motley Fool UK, these are traders who place bets that the share prices of certain companies will fall. It's risky stuff -- the potential losses are limitless -- so those that do it need to be very confident that they're on to a good (or bad) thing.
What's interesting right now is that the most-bet-against stock is actually from the FTSE 100.
Revealed - the most hated FTSE 100 stock
Supermarket giant J Sainsbury (LSE: SBRY) is currently attracting more short-selling interest than any other London-listed stock according to shorttracker.co.uk. To put this in perspective, second place goes to deeply-indebted cinema chain Cineworld. At first glance, this looks strange.
After all, the FTSE 100 member's share price hasn't done badly in recent months. Those investors who put Sainsbury's in their shopping basket around the time that positive news on vaccines was announced would be sitting on a gain of around 40%. Even those who bought at the beginning of March would have seen their holdings rise 20% in value.
So, why is this happening? There are a few potential reasons. First, it's possible that Sainsbury's sales could be about to moderate.
The great reopening of the UK reduces the need for shoppers to buy in bulk when they visit stores or place online orders. While the latter won't fall off a cliff, the lifting of restrictions might play back into the hands of competitors such as Aldi that don't offer such a service. Second, Sainsbury's CEO Simon Roberts recently reflected on how "a lot of uncertainty" following Brexit is impacting on the company's operations in Northern Ireland.
Since leaving the EU, some food products have struggled to make it to its 13 stores due to complex border requirements. This has only added to the FTSE 100 company's costs. Another thing worth bearing in mind is that Sainsbury's net debt is almost at the same level as its entire market capitalisation.
Sure, the defensive nature of its industry means investors shouldn't automatically panic. However, the last year has served as a useful reminder of the importance of having a resilient balance sheet.
So, J Sainsbury could be about to tumble?
Near-term, it's very hard to say what will happen. We can't predict future share prices with any certainty.
Nor can we know for sure whether the short interest will increase or decrease going forward. One thing to bear in mind, however, is the recent jump in the valuations of heavily shorted stocks in the US. Although the reasons for this will vary, it does show just how quickly a situation can reverse if there's a short squeeze.
For Sainsbury's, a catalyst might be an earnings surprise. It next reports on trading in July. It's also worth noting that FTSE 100 peer Morrisons also features in the top 10 most-shorted stocks.
This indicates that traders are pretty bearish on the sector as a whole.
As a growth investor, I'm not really interested in the grocery space. If I were looking to get involved though, my favourite pick remains market-leader Tesco. Interestingly, there's barely any short interest in this FTSE 100 stock.
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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Morrisons and Tesco. 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.
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