Short selling of shares in Weir Group has more than doubled since the start of the year, making the engineer’s stock the most shorted in the FTSE 100, as investors bet that slumping US gas prices will hit demand for its specialist pumps and valves.
About 16 per cent of the company’s shares were out on loan on March 28, according to Data Explorers. On January 4, the figure was 6.6 per cent. Over the same period, the average short position in the UK’s blue-chip index has remained stable at just above 1 per cent.
Weir’s shares significantly outperformed the FTSE 100 last year, thanks in large part to its exposure to the shale gas production boom in North America. One in every two of the high-pressure pumps used in the US and Canadian shale markets is supplied by Weir.
However, the new supplies unleashed by the boom have sent gas prices tumbling. In January US gas prices hit their lowest level for a decade, and as a result, some of Weir’s customers have said that they will cut back on production .
These developments have weighed on Weir’s shares. Worth £21.00 at the start of the year, they closed at £17.64 on Friday, leaving the company trading at around 11 times forward earnings, shy of the sectoral average of more than 12.
Weir declined to comment. However, analysts said that the stock was now mispriced.
Thomas Rands, of Peel Hunt, said the company “looks oversold”, and pointed out that shorting Weir was not the most efficient way to bet against the shale market, since it accounts for less than half of Weir’s £2.29bn revenues.
“Investors are ignoring the minerals part of the business, where Weir has very good market positions,” he said.
Michael Blogg of Investec said that even though Weir was the largest and most liquid industrial engineering stock in the UK, shorting it was a “brave move”.
“It is very naive to think that if activity in the shale gas sector falls, Weir’s profits will automatically fall sharply too. First, because some of the equipment will be redeployed onto oil shale. And second, because the amount of installed capacity has risen, which will give Weir scope to make money from the after-market, which is what earns its best margins anyway,” he said.
In 2009, investors who had built up an 18 per cent short position in Aggreko, the generator rental company, were caught out when the company announced a jump in profits, and Mr Blogg said that investors shorting Weir could suffer a similar fate.