Shorts bail on UK grocers
04 September 2018
Following Tesco, shorts have covered positions in Ocado, Sainsbury and Wm Morrison. Sam Pierson of IHS Markit explains more
Image: Shutterstock
• UK grocers reach five-year high market capitalisation in August
• Short position lowest since 2015, in GBP terms
• Marginal uptick in Tesco shorts following year-to-date high price as of 10 August
• Shorts stick with a position in Marks & Spencer
Shares of Tesco have traded up 23 percent year-to-date (YTD), as the turnaround under CEO Dave Lewis gathers steam. Short sellers have substantially covered their position in the UK’s largest grocer, with shares short declining 89 percent in 2018. Roughly a third of that position, 200 million shares, was linked to an arbitrage trade regarding the acquisition of Booker and was closed out on consummation in early March.
Another 200 million shares were covered over the next month leading up to the firm’s earnings report on 9 April, the positive results of which caused another 50 million short shares to be covered. Since then the upward price trend has caused the majority of remaining shorts to cover, however, there has been a marginal uptick of 15 million shares short since the TSCO price reached a YTD high on 10 August.
While the Tesco turnaround has certainly been positive for shareholders, it pales in comparison with Ocado Group Plc, shares of which are up a massive 168 percent YTD. The online-only grocer’s performance has given short sellers cause to cover, reflected in a 75 percent YTD decrease in shares short. The short covering trend began in earnest after the face-melting 65 percent share price rally which accompanied the firm inking a deal with US grocer, Kroger. The deal allows Kroger to leverage Ocado’s robotics technology with the aim of competing with Amazon in the online grocery delivery business.
After Ocado, the next best performing UK grocer in 2018 has been J Sainsbury, whose shares are up 39 percent YTD. Following the rally in early April, short sellers started to cover, with the current 185 million shares short reflecting a 37 percent decline from the start of the year. In a similar vein, the 22 percent rally in Wm Morrison shares has inspired short sellers to cover 51 percent of the short positions they had on at the start of the year.
The outlier is Marks & Spencer, which is still down 3 percent after a rally off the YTD low in April. Short sellers have stayed the course, increasing the shares short by 21 percent YTD. The stock has likely benefitted from the rally in other UK grocer stocks; if the price continues to rise, the shorts will be put in a challenging position in deciding to stick with the position.
The demand from short sellers and related lending revenue highlight a key benefit of securities lending for beneficial owners, namely that lending revenues often pick up offset losses in underperforming stocks. Ocado alone accounted for $3.5 million of lending revenues in H1 this year, 4.3 percent of all UK equity lending revenues. The other four UK grocers combined for further 2.3 percent of UK equity lending revenues. Since the start of 2016, these five stocks have combined for $43.5 million in revenues or 11 percent of total UK lending revenues (Ocado represents 2/3 of that revenue). While the decline in short demand is having a depressing impact on the lending revenues in Q3, from a total returns perspective, shareholders will be happy to forgo that revenue in exchange for the significant share price appreciation.
• Short position lowest since 2015, in GBP terms
• Marginal uptick in Tesco shorts following year-to-date high price as of 10 August
• Shorts stick with a position in Marks & Spencer
Shares of Tesco have traded up 23 percent year-to-date (YTD), as the turnaround under CEO Dave Lewis gathers steam. Short sellers have substantially covered their position in the UK’s largest grocer, with shares short declining 89 percent in 2018. Roughly a third of that position, 200 million shares, was linked to an arbitrage trade regarding the acquisition of Booker and was closed out on consummation in early March.
Another 200 million shares were covered over the next month leading up to the firm’s earnings report on 9 April, the positive results of which caused another 50 million short shares to be covered. Since then the upward price trend has caused the majority of remaining shorts to cover, however, there has been a marginal uptick of 15 million shares short since the TSCO price reached a YTD high on 10 August.
While the Tesco turnaround has certainly been positive for shareholders, it pales in comparison with Ocado Group Plc, shares of which are up a massive 168 percent YTD. The online-only grocer’s performance has given short sellers cause to cover, reflected in a 75 percent YTD decrease in shares short. The short covering trend began in earnest after the face-melting 65 percent share price rally which accompanied the firm inking a deal with US grocer, Kroger. The deal allows Kroger to leverage Ocado’s robotics technology with the aim of competing with Amazon in the online grocery delivery business.
After Ocado, the next best performing UK grocer in 2018 has been J Sainsbury, whose shares are up 39 percent YTD. Following the rally in early April, short sellers started to cover, with the current 185 million shares short reflecting a 37 percent decline from the start of the year. In a similar vein, the 22 percent rally in Wm Morrison shares has inspired short sellers to cover 51 percent of the short positions they had on at the start of the year.
The outlier is Marks & Spencer, which is still down 3 percent after a rally off the YTD low in April. Short sellers have stayed the course, increasing the shares short by 21 percent YTD. The stock has likely benefitted from the rally in other UK grocer stocks; if the price continues to rise, the shorts will be put in a challenging position in deciding to stick with the position.
The demand from short sellers and related lending revenue highlight a key benefit of securities lending for beneficial owners, namely that lending revenues often pick up offset losses in underperforming stocks. Ocado alone accounted for $3.5 million of lending revenues in H1 this year, 4.3 percent of all UK equity lending revenues. The other four UK grocers combined for further 2.3 percent of UK equity lending revenues. Since the start of 2016, these five stocks have combined for $43.5 million in revenues or 11 percent of total UK lending revenues (Ocado represents 2/3 of that revenue). While the decline in short demand is having a depressing impact on the lending revenues in Q3, from a total returns perspective, shareholders will be happy to forgo that revenue in exchange for the significant share price appreciation.
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