Back in February we called Carillion as our Short of the Week. This means we saw both short and medium term opportunities for traders to short Carillion shares using CFDs or financial spread bets. Carillion shares have since become the gift that keeps on giving.
At the time of our article, Carillion shares were trading at just north of 220. Now, as of today, they are trading at around the 19 mark. Traders who have kept consistently short of this price over the past year will have cleaned up. Those who had Carillion short in July when its shares fell off a cliff will have done particularly well.
We could already see the cracks appearing in Carillion back in February. At the time one of our biggest issues with the company was its reliance on infrastructure contracts from the Middle East. We were concerned that it might be leaving itself open to a lack of future business from that direction if the oil price slipped.
Carillion shares: further short side opportunity?
Right now it is less an issue of whether you can squeeze any more profit out of shorting Carillion shares – will the company still be around for much longer? The company’s management is in the process of cooking up a proposal to restore the company’s balance sheet.
This is a big company. It employs over 40,000 people globally. It is responsible for day to day services delivered to prisons and hospitals across the country. It is a huge beneficiary of government money. Yet this is a company with debts of over £1.5 billion and a market capitalisation of £81 million. Yes, you read that right.
It is highly likely that Carillion will need to be bailed out by the government if its bankers refuse to lend it any more. We’ve moved past the issue of whether Carillion will be able to survive in the tough post-Brexit environment, to one of whether it can actually continue to function competitively.
FCA investigation complements death spiral
If this was not all bad enough, the company is also now under investigation by the Financial Conduct Authority (FCA) which is not happy with the timing of its stock market announcements. Part of the FCA’s worries concern the big short positions that some hedge funds – and The Armchair Trader’s readers – were building up against Carillion ahead of revelations in the summer which sent Carillion shares into a possible death spiral.
We would argue there is no secret to this – it is more a case of taking some time to look more closely at struggling companies. Certainly the aggressive short interest in Carillion stock was obvious in the market a year ago. But there were good reasons for it.
For now, the big question is whether Carillion can pull its chestnuts out of the fire. The most likely scenario is that the banks – which have a lot of other worries – will refuse to advance much more cash to Carillion. The government will then be forced to bail the company out. We think the time to short the stock is over. There could be scope for some upside moves now, but we don’t see the company as a long term buy.