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Short of the Week: Kingfisher shares look cheap but hedge funds circling


Shorting stock in this market is about as easy as it will ever get, but some UK stocks are standing out at the moment in terms of the rapidly building number of shorts. Kingfisher (LSE:KGF) is right in the sights of several big hedge funds which have declared short positions.

Kingfisher shares have been dropping steadily since the start of the year. They are off 30% on a YTD basis and 34% over 12 months. A number of pundits, not least of them the Daily Telegraph newspaper, are arguing that the stock is now cheap and a possible buy, but the sentiment on the UK economy we are receiving from several directions is that UK economy is still too high risk to bet on medium term.

Kingfisher CEO Thierry Garnier is playing defence, and that’s his job after all, arguing that “our continued strategic progress has enabled us to retain a significant proportion of the increased sales during the pandemic. We continue to effectively manage inflationary and supply chain pressures. Looking forward, we are reiterating our profit guidance for FY 22/23.”

Kingfisher is a FTSE 100 constituent, and controls a number of popular DIY brands, including B&Q, Castorama, Brico Dépôt, Screwfix, TradePoint and Koçtaş. It also has a presence in eight countries, not just the UK, so could be seen as more of a pan-European bet. BUT, its Q1 update saw revenue down 5.8% to £3.25bn, and UK / Ireland sales were off by a staggering 14.2%. French sales were also down 6.3%. While Kingfisher has argued that its international sales are UP 30%, that’s still only £575m, currently dwarfed by its UK sales.

This is NOT a diversified international group to the degree that an investor might want.

Hedge funds continue to build shorts on Kingfisher

As for the hedge funds, we have a number now that ARE building considerable short positions on Kingfisher. While the shares have already given up some value, the fact that they are still adding to their short positions in June means they think the shares have further to fall. AKO Capital has a fairly big short on Kingfisher at 1.56% while BlackRock has 1.63% and Marshall Wace is in for 1.8%. All of these funds raised their Kingfisher short positions in June.

While total short action on Kingfisher reached close to 6% in December 2019 many hedge funds backed off the trade during the pandemic as the lockdown drove many punters into B&Q stores to start home improvement projects (one of the few types of store allowed to stay open in the UK). This has now changed as households have other things to spend their money on, like soaring petrol and electricity. Kingfisher shorts have increased markedly since Q4 last year.

Source: Deshe Analytics

Data from Israeli artificial intelligence specialists Deshe Analytics supports the negative sentiment around Kingfisher. Despite the 5.6x PE ratio, they rate it an underperform. Big areas of concern are the balance sheet and the cash flow situation. Cash and cash equivalents do not measure up well against their sector. This “should hurt the stock price” in Deshe’s view. “These liabilities metrics show that management has been unsuccessful in encouraging healthy growth while managing liabilities. Discouraging results like these statistically lead to negative movement in stock prices, so we rated their liabilities movement component 47/100.”

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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