November 18, 2012 6:39 pm

UK industrials escape short selling

Short selling of shares of UK industrial companies is at an unexpected low in spite of a spate of profit warnings over the past month.

Some 2 per cent of FTSE 350 industrial’s shares are out on loan. While this is higher than the 1.6 per cent average for the whole index, according to data from Markit, the research company, it is lower than expected given how poorly industrial companies have performed over the past year.

FTSE 350 chart

FTSE 350 chart

“Given the negative developments in the sector this is a surprise, and we would expect the short interest to be higher,” Oliver Wynne-James, analyst at Panmure Gordon, said.

Traders and analysts warn, however, that this relative lack of shorting activity may not reflect investors’ hope that the worst is over for industrial companies. Instead, it may be due to more short-term factors as the latest reporting season draws to a close.

Weir Group, for example, was the most shorted stock in the FTSE 100 index earlier this month, with about one-fifth of its shares out on loan ahead of its third quarter trading update.

But, inspite of a marked decline in like-for-like sales and a relatively banal reiteration of full-year expectations, Weir’s shares jumped 5 per cent as short sellers scrambled to cover their position with no further bad news forthcoming.

Likewise, both Spectris and WS Atkins rose more than 10 per cent when the FTSE 250 companies reiterated full-year expectations.

But in many other UK industrial companies, short-sellers made gains from recent profit warnings by fellow UK engineers including Melrose, GKN, Cookson and Morgan Crucible – all of which blamed marketplace uncertainty for their lowered guidance.

“As we approach the end of the interim management statement season, the only clarity is that there is not any,” said Chris Dyett, analyst at Investec.

Most of the recent profit warnings by UK industrial companies blamed destocking by their customers – a trend that investors appear to be betting will evaporate early in 2013.

Weir, being highly exposed to the US shale gas market, is a prime example: its customers’ 2012 exploration budgets are widely seen to be exhausted, and the group expects a boost when spending returns in the new year.

“Is this the end [of bad news for UK industrials], is it all over? Probably not, in reality,” said Alexander Virgo, analyst at Berenberg. “We could still end up with disappointing results in the fourth quarter.”

Simon Peckham, chief executive of Melrose, also hinted at more gloom on the horizon, and suggested that the dismal sentiment for 2013 he warned of could be repeated by other companies in the coming months.

“We will sit much more comfortably in a week’s time having been honest with the marketplace, not having put our head in the sand,” he said.

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