A lesson from Carillion’s share price collapse

Carillion shares short

It has been a brutal 12-month period for Carillion (LON: CLLN) shareholders.

Trading at 240p in January 2017, the shares last traded at 14.2p before the company went into ‘liquidation’ on Monday. Liquidation means that Carillion has ceased trading. The liquidator will attempt to offload any remaining assets and distribute them to the company’s creditors.

Will shareholders see anything back from Carillion? It’s unlikely, in my view. The company had a significant pile of debt, and creditors will need to be paid back before shareholders receive anything.

Is there anything we can learn from Carillion’s share price collapse?

Yes, there is.

One key lesson: WATCH THE SHORTERS.

How shorting works

Shorting is the process of betting against a stock. It’s mainly done by hedge funds and other sophisticated investors. Shorters profit when the share price of the company being shorted falls.

The market is full of ‘weak’ longs. These are investors that hold a stock because it’s part of the index or because everyone else owns it.

However, you rarely find a weak short.

Shorters generally bet against a company for a particular reason. They’re convinced there’s something fundamentally wrong with the company, whether it’s high levels of debt, falling sales or an unjustified valuation. Therefore, they want to see it fail.

One of the easiest ways to monitor short interest is through the website shorttracker.co.uk. It tells you which UK companies are the most shorted.

If you see that a company is heavily shorted, you need to be careful.

Carillion had heavy short interest

In Carillion’s case, the stock had an extraordinary level of short interest for quite some time. At one stage, around a third of the company’s shares were being shorted.

I wrote about this over at The Motley Fool in July after the company’s first profit warning.

I also advised investors to steer clear of Carillion in late October when the share price rallied, and reiterated my view in late December.

When a stock is being shorted to that degree, it pays to steer well clear. It suggests that many hedge fund managers (some of the smartest minds in the business) see something drastically wrong with the company.

Don’t try to be a hero in these situations. Take your money and run.

Shorted dividend stocks

So what other UK stocks are being heavily shorted right now?

Are there any dividend stocks on the list?

Yes, there are. Check out the list below of the most shorted stocks at present:

Carillion shares short

Source: shorttracker.co.uk

Debenhams is currently the second most shorted stock in the UK with 14.3% short interest. Steer clear!

Sainsbury’s comes in at number nine with 10.6% short interest, while Marks & Spencer and WM Morrison have short interest of 10.2% and 10.0% respectively. While these levels of short interest aren’t as high as the level Carillion had recently, I’d say caution is still warranted towards these stocks. Playing it safe is often the best option.

Disclosure: Edward Sheldon, CFA has no position in any shares mentioned.  

This article is provided for general information only and is not intended to be investment advice. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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