Hedge funds expect Royal Mail’s share price to fall. This is what I’d do now

Royal Mail is currently the fifth most shorted stock on the London Stock Exchange. This means hedge funds expect Royal Mail’s share price to plummet.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

One thing I always keep an eye on when researching stocks is the list of the most shorted stocks in the UK. These are the stocks that hedge funds and other sophisticated investors are betting against heavily. It pays to be cautious with heavily-shorted stocks. Often, they go on to lose a lot of their value.

Looking at the current list of most shorted stocks, one company stands out. That’s Royal Mail (LSE: RMG). This is a stock that’s owned by a large number of private investors in the UK. Worryingly, it’s currently the fifth most shorted stock on the London Stock Exchange with 7.7% of its shares being shorted. This means that plenty of very smart investors expect Royal Mail’s share price to fall.

So, what’s the best move for private investors now? Is it time to sell Royal Mail shares?

Passive income stocks: our picks

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

Hedgies expect Royal Mail’s share price to tank

It’s not hard to see why hedge funds expect its share price to fall. Recent full-year results, issued on 25 June, were ugly. For the year, adjusted profit before tax was down 31% to £275m while basic earnings per share (EPS) fell 36% to 19.6p. The board decided not to recommend a final dividend for 2019-20.

Meanwhile, guidance for the near term wasn’t encouraging. Royal Mail provided two potential scenarios. In the worse of the two, which assumed a UK GDP decline of 15% (Q2 GDP was down 20.4%), it said UK revenue could be between £500m to £600m lower year-on-year.

Clearly, Royal Mail is experiencing challenges right now. It could be a while before the company turns things around.

Broker price targets: well below the current share price

Looking at City analysts’ views on Royal Mail, the outlook is quite bearish. For starters, analysts are continuing to downgrade their EPS forecasts. Over the last month, the consensus forecast for the year ending 29 March 2021 has fallen about 2p to -19.1p. This kind of downgrade activity could put pressure on Royal Mail’s share price.

Secondly, plenty of analysts have 12-month price targets well below the current share price. Liberum, for example, which rates the stock as a ‘sell’, has a price target of 115p. That’s about 45% below the current share price. Meanwhile, Credit Suisse has a target of just 94p. That’s about 55% below the current share price. The median broker share price target is 161p – about 24% below the current share price.

I’d sell

Royal Mail’s share price has enjoyed a brief rally recently, rising from about 160p to 212p over the last six weeks or so. Yet the outlook for Royal Mail looks quite grim at the moment, in my view. I wouldn’t be surprised to see the share price fall again.

Weighing everything up, I’d be looking to sell into any share price strength. I’d then move the proceeds of the sale into high-quality, resilient businesses with strong growth prospects.

This AI stock is becoming a digital juggernaut in a £ 12.5 billion market!

🤖 Curious about the next big player in AI? 🤖

Our leading industry analysts have uncovered a trailblazing content platform that's revolutionising the industry with its unparalleled generative AI technology, setting new standards in creativity and efficiency.

Care for a sneak peek?

Trusted by global giants like Amazon, Disney, and Netflix, this innovative company is not just transforming digital media with AI-generated 3D content but is also capturing a significant share of a £12.7 billion market!

With a remarkable 62% gross margin, indicating exceptional profitability and operational efficiency, this company's growth trajectory positions it as a must-watch for savvy investors.

Best of all, we're offering exclusive access to the name of this game-changing stock, absolutely free!

Discover your free AI stock pick

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Edward Sheldon has no position in any 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.

More on Investing Articles

Investing Articles

At $184, I reckon this S&P 500 juggernaut is still on sale

Our writer sees Amazon (NASDAQ:AMZN) as an attractive S&P 500 stock to consider while it is priced 23% lower than…

Read more »

Investing Articles

Cheap FTSE 250 shares to consider buying right now?

These FTSE 250 growth stocks had weak starts to 2025, and face short-term uncertainty. But their long-term valuations could be…

Read more »

Investing Articles

As stocks dive, is this a rare chance for ISA investors to build generational wealth?

Globally, stocks have pulled back significantly following the announcement of tariffs by the US president. Is this an opportunity for…

Read more »

Investing Articles

2 ultra-cheap shares to consider right now!

These cheap UK shares offer considerable growth and income potential over the long term, reckons our writer Royston Wild.

Read more »

Investing Articles

Legal & General Group shares go ex-dividend on 24 April – time to grab that 9% yield?

Harvey Jones holds Legal & General Group shares and is already looking forward to the next bumper dividend from this…

Read more »

Young female analyst working at her desk in the office
Investing Articles

3 FTSE 100 dividend stocks to consider buying while they’re on sale

Paul Summers reckons canny investors should think about snapping up quality, dividend-paying stocks while they're going cheap

Read more »

Investing Articles

2 cheap passive income shares to consider buying right now

The passive income we can earn from the UK stock market looks set to climb this year, and could even…

Read more »

Investing Articles

Down 15% in a month, this FTSE 100 dividend share offers investors a stunning 10.8% yield

Harvey Jones plucks out a FTSE 100 dividend share that offers frankly a quite staggering yield and is now a…

Read more »