Asset management company abrdn (LSE: ABDN) is the most shorted stock in the UK right now. What this means is that many sophisticated investors (eg hedge funds) are betting that the FTSE 250 stock is going to tank.
Is this a red flag? I think so. Here’s why.
Shorting explained
Shorting is the process of betting against a stock. It involves borrowing shares from another investor, selling them to someone else, and then hopefully buying back them at a lower price and pocketing the difference between the price they were sold at and the price they were bought back at (before returning them to the lender).
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Now, one thing I’ve learnt over the years is that when a stock’s heavily shorted, it can be worth approaching it with caution. Typically, those who short stocks are very smart investors. And usually, they’ve done a lot of research on the companies they’re shorting. Shorting can backfire in a big way if a shorted stock rises (losses are theoretically infinite), so short sellers normally have a high level of conviction in their short bets.
abrdn’s being targeted
It’s not hard to find out which UK stocks are heavily shorted these days. The data’s available from the Financial Conduct Authority (FCA) website and on other websites such as shorttracker.co.uk. Currently, the data shows abrdn’s the most shorted stock with 6% of its shares being shorted. In total, five companies are shorting it.
Fundamental problems
To be honest, I’m not surprised this stock’s the focus of short sellers at present. Looking at the company, I see a lot of fundamental problems.
For starters, retail investors continue to pile into passive index funds offered by the likes of iShares and Vanguard instead of actively-managed funds. This trend’s unlikely to reverse any time soon.
One factor that’s not going to help abrdn here is the performance track record of its funds, which is dreadful. Last year, only 17% of its equity funds outperformed their benchmarks.
The company’s name is probably also not doing it any favours. Having worked on several global asset management studies in the last few years, I know that many financial advisers dislike the name.
Another issue is the dividend. Ultimately, the high yield (10%) here doesn’t look sustainable. Viewing analysts’ forecasts, earnings aren’t projected to cover the payout this year or next. So a dividend cut could be on the horizon.
Finally, it’s worth highlighting the share price action here. Over the last year, it’s fallen 21%. Over three and five years, it’s dipped 41% and 54% respectively. Clearly, the long-term trend is down.
Can abrdn turn things around?
Now, it’s worth noting that the company has acknowledged it’s facing some challenges. And it’s trying to turn things around.
Last month, it overhauled its leadership team and formed a group operating committee to drive performance improvements. So we could potentially see the company’s outlook improve.
The company could also be a takeover target. If a bid was to come in from another firm, the share price could rise.
Overall though, the investment case doesn’t look great. And given the high level of short interest, I think investors should consider avoiding the stock.
