Rewind a few weeks and I questioned whether future polyhalite miner Sirius Minerals’ share price was about to fall off a cliff.
Last week, it tumbled almost 30% in value, albeit from a slightly higher price than when I looked at it. Chalk up another victory for the short sellers — those who are so confident in their research that they’re willing to bet on a company’s share price going the wrong way, at least over the short term.
You can read more about the reasons for this fall in my Foolish colleague Roland Head’s article.
Today, I’m more concerned with asking whether the share prices of two other firms — already popular among the shorting community — are likely to continue going down, perhaps dramatically so.
Watch out below!
With no less than 9.4% of stock being shorted, retailer Marks & Spencer (LSE: MKS) is currently the fifth least-liked company on the London Stock Exchange.
When you consider the issues affecting many on the high street, ongoing difficulties with its clothing range and even Brexit, this might not seem all that surprising.
But can Marks prove the shorters wrong? It’s a tricky one.
The recent deal with Ocado to allow the company to compete in the online grocery shopping market could eventually revitalise the £4.5bn cap. The closure of less profitable units and the recent cut to the dividend feel prudent compared to some other firms offering unsustainable yields in the FTSE 100.
Then again, there’s no guarantee those who shopped with Waitrose (Ocado’s previous client) will make the switch. Another question mark concerns its food offering being regarded as something of a ‘treat’, meaning that most online baskets won’t be overflowing. I’m not going to hold my breath on a warmly-received clothing range.
If trading at Marks does recover then a ‘squeeze’ (where a share price leaps as a result of shorters rushing to close their positions) could ensue. That looks some way off though.
For now, it’s trading on 11 times expected 2019/20 earnings.
Those contrarians considering buying sooner rather than later may wish to wait until after full-year results are revealed on 22 May.
Time to take profit?
Slightly less hated than Marks (but still heavily shorted) is top-tier peer and mining giant Anglo American (LSE: AAL).
Curiously, Anglo’s share price has been on a very different trajectory in recent months.
Priced below 1,500p back in September, the very same stock is changing hands at almost 2,000p a pop at the time of writing. Go back to the beginning of April and it was trading even higher.
A rise in commodity prices and positive broker upgrades are two reasons for this. A possible resolution to the China/US trade war would also appear to be partly responsible as is news from the latter that interest rate rises might not be as regular or swift as previously thought.
That said, a slowing of growth in the former — the biggest user of metals — could see sentiment quickly reverse. That goes some way to explaining why Anglo’s stock is still trading on under 9 times forecast earnings. This valuation suggests the market still needs to be convinced this won’t happen.
If it does, the share price fall could be severe, especially if the dividend needs to be sliced (Anglo currently yields 4.7%).
Only you can decide if this is a risk worth taking.
