It’s a good idea (in my opinion, at least) to see what UK shares the market’s big beasts are betting against when deciding what to invest in. Many financial websites and organisations publish readily-available data showing which stocks hedge funds and institutional investors are ‘shorting’. These are the equities that major investing like these are expecting to make them money by falling in price.
The process of shorting “involves an investor borrowing and selling shares they do not actually own in the hope of repurchasing them at a lower price at a later date”. Major investors like hedge funds have made fortunes by playing the market this way. But they don’t always get it right.
Exchange-traded fund (ETF) provider GraniteShares has just published its list of Britain’s most shorted stocks. The following UK shares occupy the top two positions of companies the big players are expecting to slump. Should I avoid them like the plague? Or, as a long-term investor, should I take a punt?
#1: Cineworld
Cinema operator Cineworld Group (LSE: CINE) has long been the London Stock Exchange’s most-shorted share. According to GraniteShares, a whopping 8.8% of its stock is currently held short. This doesn’t come as a massive surprise to me.
I used to own shares in Cineworld, but sold out at the height of the Covid-19 crisis in autumn 2020. I sold at a time when its cinemas remained shuttered and it had a hulking amount of debt on the balance sheet. At that time, a coronavirus vaccine was yet to be produced and uncertainty loomed as to when the business would reopen its doors.
The outlook has improved for Cineworld since then. Vaccines mean that theatres in its core markets have re-opened and strong trading in recent months shows how strongly the pull of the cinema remains in the post-coronavirus age. Sales in December came in at almost 90% of 2019 levels, latest financials showed. A string of blockbusters in 2022 and beyond could keep its cinemas packed out too.
Massive debts cast a shadow
That said, it’s still far too early to claim that Cineworld is out of the woods. My main concern is the enormous multi-billion-dollar debts that still sit on the company’s balance sheet.
At best this could hamper its ability to capitalise on the rebounding movie industry compared to other cinema chains. It might also affect the levels of investment Cineworld can make to take on Netflix and the other streaming giants. Major changes to the way studios release their films has also raised the stakes for cinema operators like this.
My main worry though is how Cineworld’s net debts could strangle the business if the coronavirus crisis worsens again. These stood at a mammoth $8.4bn as of last June. The sudden and severe recent impact of the Omicron variant — and the return of masks and social restrictions in many territories — underlines the ongoing risk to leisure shares like this.
Cineworld’s debts are set to grow further after a legal ruling related to its abandoned takeover of Canada’s Cineplex too.
#2: Petropavlovsk
Mining company Petropavlovsk (LSE: POG) is another UK share that’s in peril of falling in value. But unlike Cineworld, I think it might be worth close attention today. This is because I believe the outlook for gold prices remains pretty bright.
According to GraniteShares, 6.1% of Petropavlovsk’s shares are currently shorted, putting it second on the list of least-desirable UK shares. Gold stocks have come under extreme pressure in recent months as rocketing inflation across the globe has led to expectations of extreme central bank policy tightening.
When interest rates rise, the value of the US dollar increases, the prime currency in which the yellow metal is traded. This makes it less cost effective to buy the commodity and so demand for it drops, yanking prices lower in the process.
To illustrate the point, Petropavlovsk’s share price just closed at two-year lows below 15p after the Federal Reserve suggested it could raise rates sooner and more sharply than the market had been anticipating. The central bank’s appetite for serious action could grow too if key inflation gauges continue to show runaway price rises. Consumer prices in the States were recently rising at their fastest rate since 1982.
Could gold prices soar again?
Still, it’s my opinion that gold prices — and by extension Petropavlovsk’s share price — could stage a strong recovery. The safe-haven metal surged to its highest price on record above $2,070 per ounce in summer 2020 as Covid-19 bashed the world economy and investor confidence. As I mentioned above, another flare-up in the pandemic could happen at any stage and turbocharge demand for gold again.
There are other reasons why gold could soar in the near future as well. Recent military developments surrounding Ukraine helped the precious metal climb before those Federal Reserve comments prompted another about-turn. A full-scale invasion would likely push investor interest in flight-to-safety bullion much higher again. I’m also aware that Russian and Chinese expansionism could provide a long-term driver for gold values too.
Looking at Petropavlovsk more closely, I think the steady ramping up of its low-cost POX Hub could help profits (and by extension the share price) rise strongly over the long term as well.
At current prices, Cineworld’s share price commands a forward price-to-earnings (P/E) ratio of 16.9 times. I think this looks quite expensive, given the firm’s high debt levels and the huge risks it faces. But, by comparison, Petropavlovsk trades on a modest P/E multiple of 4.8 times.
I think this makes it highly-attractive from a risk-to-reward basis. Indeed, I’d happily buy the gold miner for my own UK shares portfolio today.
Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
