Hedge funds are betting big against these struggling UK shares

Institutional investors don’t always bet on UK shares going up. Right now, there are a lot of active short positions betting against both large and small-cap companies on the London Stock Exchange. And right now, the three most heavily shorted stocks in the UK are Ashtead Technology (LSE:AT.), J Sainsbury (LSE:SBRY), and Yellow Cake (LSE:YCA).

Company	Short Position	Number of Firms	12-Month Performance
Ashtead Technology	7.1%	8	-44%
J Sainsbury	6.9%	5	+6%
Yellow Cake	5.9%	7	-1%

When stocks are heavily shorted, investors can gain critical insights into what the professionals are thinking. A quick glance at the 12-month performance of Ashtead Technology (not to be confused with Ashtead Group) suggests a good reason to be pessimistic. But for J Sainsbury and Yellow Cake, these UK shares are seemingly proving to be more resilient, at least for now.

So, why are the experts betting against these businesses? And should investors be avoiding them like the plague?

What’s going on?

Each business operates in different industries and is facing its own unique challenges.

Ashtead Technology has encountered numerous operational and geopolitical pressures that have culminated in a profit warning. And it seems hedge funds think the worst is far from over.
J Sainsbury had been losing market share to Tesco and discount retailers but has been gaining it more recently. However, that situation could reverse should a full-blown pricing war erupt as inflationary pressures squeeze consumer spending.
Yellow Cake is feeling the pinch of falling uranium prices, with concerns that rising operational costs may force management to sell some of its commodity reserves at weaker prices.

Given that these headwinds are proving to be quite persistent, it seems short sellers don’t believe the problems surrounding these businesses will be resolved quickly. And if that hunch is correct, then shareholders could be in for a rough ride.

Short sellers aren’t always right

Yet while hedge funds have access to expensive market research and data, not every bet they make is a success.

Sometimes, a large short position can present a lucrative opportunity for long-term investors. Why? Because if sentiment suddenly turns positive, the unwinding of a major short position can send a stock flying upward. And looking at these three stocks, there are some potential catalysts for a mood change.

Ashtead Technology still has a substantial order backlog, providing good revenue visibility. Management is already implementing efficiency initiatives to bring down costs in the short term. And if geopolitical tensions ease, market conditions could quickly and significantly recover.

Sainsbury’s latest trading update has also shown better-than-expected resilience, with like-for-like sales growth reaching 4.7% thanks to its Nectar loyalty programme. As for Yellow Cake, the rising level of investment into nuclear energy technology is expected to boost uranium prices significantly if global supply fails to keep up with demand.

The bottom line

Despite the weak sentiment from institutional investors, there are still some promising signs of potential with these businesses. And while I think it’s still too soon to determine whether these stocks can deliver a surprise comeback, I’m not writing off any of them just yet. That’s why investors may want to consider keeping a close eye on these UK shares as they continue navigating through short-term choppy waters.

The post Hedge funds are betting big against these struggling UK shares appeared first on The Motley Fool UK.

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Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has recommended Ashtead Group Plc, Ashtead Technology Plc, and J Sainsbury Plc. 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.