Their predicament hasn’t gone unnoticed by short sellers, stock pickers who seek to make money by borrowing shares, selling them and buying them back at a cheaper price.
Sainsbury's and Morrisons are the most shorted companies in the UK’s benchmark FTSE 100 Index, with short interest equivalent to about 13 per cent of their outstanding shares, according to data compiled by researcher Markit. Only 0.6 per cent of Tesco’s shares are on loan from financial institutions to short sellers.
"Heavy shorting makes large shareholders question their investment strategy,” said Charles Allen, an analyst at Bloomberg Intelligence. “Many of those shorting Sainsbury probably feel there’s still room for estimates to fall.”
Tesco’s results last week showed what’s influencing investor thinking. While a record loss and spiraling debt grabbed the headlines, Tesco increased grocery volume in the last quarter compared with a year earlier, the first time it’s done so in more than four years.
“If Tesco is growing volumes, then someone should be losing,” said John Kershaw, an analyst at Exane BNP Paribas. “There isn’t enough superstore growth to go around.”
Price War
At a press conference last week, Lewis said sales growth will continue to be his priority as he seeks to take the initiative in a price war between supermarkets.
For mainstream rivals, that was the most “worrying” development from Tesco’s results, said Richard Marwood, who oversees about $4.5 billion in assets at Axa Investment Managers, including Tesco and Sainsbury shares. “The pessimism around Sainsbury stems from a feeling that a price war could potentially impact the company more, due to its slightly higher price point.”
Sainsbury’s record of nine consecutive years of operating profit growth is about to come to a halt, with analysts projecting the company will post a 17 per cent drop in the earnings measure when it reports annual results next week.
CEO Mike Coupe has forecast that the grocer’s superior quality and value would see sales outperform peers, yet Sainsbury shares, trading at 12 times the company’s estimated 2016 earnings, are the cheapest in the industry.
Bloomberg News, edited by ESM
