Short selling data can be a very effective risk management tool. Short sellers are high-conviction traders. If they’re targeting a stock, there’s usually a good reason they are doing so.
In this report, we are going to look at the short selling data on Naked Wines PLC (WINE:LN). Naked Wines is a UK-based wine retailer that operates a subscription-based business model. It is listed on the Alternative Investment Market (AIM) of the London Stock Exchange and currently has a market cap of £79.33 million.
Short interest at Naked Wines is rising
Looking at the short selling data on Naked Wines, we see a couple of red flags.
One is that the number of shares on loan has risen dramatically in recent months. At the start of August, there were around 2.9 million shares on loan. Today, however, there are approximately 5.16 million shares on loan (around 8.1% of the free float). This tells us that the short sellers have been ramping up their downside bets here.
Another red flag is that utilization has risen from 48% at the start of August to 100% today. Utilization is the ratio of the number of shares that have been lent out to those that are still available on the securities lending market, given as a percentage. It's essentially a gauge of how much demand short sellers have for shares. A reading of 100% indicates that demand for the stock on the short side is very high right now.
Why are short sellers targeting Naked Wines?
As for why the short sellers are ramping up their downside bets here, it is probably related to the fact that the macro environment is creating uncertainty and that consumers are returning to physical stores after Covid. It is probably also related to the fact that Naked Wines has a poor record when it comes to profitability and that it has had some liquidity issues lately.
Now, in October, Naked Wines did advise that it has recently taken steps to reconfigure the business. Specifically, it said that it had:
- Taken decisive action to focus on profitability instead of growth
- Reduced marketing investment that wasn’t delivering satisfactory returns
- Restructured some of the company’s teams to create a leaner and more focused business
- Renegotiated its banking facilities to ensure that it’s well funded
Management believes these steps will lay the foundation for a return to sustained, profitable growth.
However, this plan hasn’t deterred the short sellers from betting against the stock. In fact, since the plan was announced on October 20, short interest has actually risen.
Given the rising level of short interest here, we think caution is warranted towards the stock right now.