Hedge funds expect Royal Mail's share price to fall. This is what I'd do now

[Janet Brum]

https://www.fool.co.uk/investing/2020/0 ... id-do-now/" onclick="window.open(this.href);return false;


One thing I always keep an eye on when researching stocks is the list of the most shorted stocks in the UK. These are the stocks that hedge funds and other sophisticated investors are betting against heavily. It pays to be cautious with heavily-shorted stocks. Often, they go on to lose a lot of their value.

Looking at the current list of most shorted stocks, one company stands out. That’s Royal Mail (LSE: RMG). This is a stock that’s owned by a large number of private investors in the UK. Worryingly, it’s currently the fifth most shorted stock on the London Stock Exchange with 7.7% of its shares being shorted. This means that plenty of very smart investors expect Royal Mail’s share price to fall.


So, what’s the best move for private investors now? Is it time to sell Royal Mail shares?


Hedgies expect Royal Mail’s share price to tank

It’s not hard to see why hedge funds expect its share price to fall. Recent full-year results, issued on 25 June, were ugly. For the year, adjusted profit before tax was down 31% to £275m while basic earnings per share (EPS) fell 36% to 19.6p. The board decided not to recommend a final dividend for 2019-20.

Meanwhile, guidance for the near term wasn’t encouraging. Royal Mail provided two potential scenarios. In the worse of the two, which assumed a UK GDP decline of 15% (Q2 GDP was down 20.4%), it said UK revenue could be between £500m to £600m lower year-on-year.

Clearly, Royal Mail is experiencing challenges right now. It could be a while before the company turns things around.
Broker price targets: well below the current share price

Looking at City analysts’ views on Royal Mail, the outlook is quite bearish. For starters, analysts are continuing to downgrade their EPS forecasts. Over the last month, the consensus forecast for the year ending 29 March 2021 has fallen about 2p to -19.1p. This kind of downgrade activity could put pressure on Royal Mail’s share price.

Secondly, plenty of analysts have 12-month price targets well below the current share price. Liberum, for example, which rates the stock as a ‘sell’, has a price target of 115p. That’s about 45% below the current share price. Meanwhile, Credit Suisse has a target of just 94p. That’s about 55% below the current share price. The median broker share price target is 161p – about 24% below the current share price.
I’d sell

Royal Mail’s share price has enjoyed a brief rally recently, rising from about 160p to 212p over the last six weeks or so. Yet the outlook for Royal Mail looks quite grim at the moment, in my view. I wouldn’t be surprised to see the share price fall again.

Weighing everything up, I’d be looking to sell into any share price strength. I’d then move the proceeds of the sale into high-quality, resilient businesses with strong growth prospects.

Like this company, perhaps.

[wacko74]

Another scumbag short position holder doing what they do.

I imagine a few shorters are now pretty gutted to have not closed their positions when RMG was down at 120p-130p.

I expect we'll see more of this kind of negative talk as they desperately try to drive the share price back down.

[Janet Brum]

True, I think the shares price will go up.

[tractorboy2]

Is it just a coincidence that since this was posted the share price has gone down around 30p.

[Janet Brum]

It`s up and down atm, like everybody else:)

[tractorboy2]

When you posted the the story , the share price was 212p.

[Janet Brum]

That was 2 weeks ago, we should wait a bit more :)

[wacko74]

Is it just a coincidence that since this was posted the share price has gone down around 30p.

What the question should be is what caused it to spike up to around 220p in mid Aug in the first place? Before predictably falling away again.

This share has been subject to heavy manipulation pretty much from the IPO, firstly with the classic 'pump n' dump' driving it to over 600p before they bailed out with their gains, then the shorters took over and used their combined efforts to drive it down to well below fair market value.

[k979aaa]

Is it just a coincidence that since this was posted the share price has gone down around 30p.

What the question should be is what caused it to spike up to around 220p in mid Aug in the first place? Before predictably falling away again.

This share has been subject to heavy manipulation pretty much from the IPO, firstly with the classic 'pump n' dump' driving it to over 600p before they bailed out with their gains, then the shorters took over and used their combined efforts to drive it down to well below fair market value.

For that is what Capitalism is all about gaining a profit from others sacrifice!

[wacko74]

Is it just a coincidence that since this was posted the share price has gone down around 30p.

What the question should be is what caused it to spike up to around 220p in mid Aug in the first place? Before predictably falling away again.

This share has been subject to heavy manipulation pretty much from the IPO, firstly with the classic 'pump n' dump' driving it to over 600p before they bailed out with their gains, then the shorters took over and used their combined efforts to drive it down to well below fair market value.

For that is what Capitalism is all about gaining a profit from others sacrifice!

I've said this before but what we have is very far from how true Free Market Capitalism is supposed to operate.

Proper Capitalism is actually a relatively fair system for all, even the workers, where private companies pay a decent living wage allowing their workers the disposable income to consume the services and goods within the economy, thus supporting that economy. Any company that can only exist by paying poverty level wages and relying on govt to subsidise those wages with ''in work benefits'' simply wouldn't exist under true Free Market Capitalism.

We don't actually have Free Market Capitalism what we have is a combination of Corporatism and Oligarchy.

[Janet Brum]

These fool.uk people are never happy : https://www.fool.co.uk/investing/2020/0 ... yre-cheap/" onclick="window.open(this.href);return false;




Investors who bought Royal Mail (LSE: RMG) shares when they were sold by the UK government would have done well – for a little while. Anyone buying the shares since then (and in the last two years in particular), not so much, as Royal Mail shares have tumbled. Now on a trailing P/E of 12, even though the shares are relatively cheap I think they will fall further. These are the reasons why.
Continued decline in UK profitability

A trading update this month showed Royal Mail is still expected to make a material loss this year. That’s despite £200m of operating cost savings planned in the division this year, and a further £130m in 2021-2022.


This follows on from other negative updates this year. Back in March, Royal Mail warned that the group has suspended guidance for 2020-2021 and all future periods, with delays to the Journey 2024 plan. The group also cut its final dividend in response to Covid-19.

Back then it also warned that its finances would become problematic if difficult conditions were still around in September. With a lot of the UK now in local lockdowns, and more government restrictions coming in, that’s exactly the situation we’re now in.

The years when conditions were better didn’t inspire confidence in the business. Profits before tax have been volatile over recent years, although the company has remained profitable. The inability to grow profits consistently makes Royal Mail shares risky, I feel.

Also, the problems will continue while its highly unionised workforce resists proposed changes to automate warehouses. RMG’s high costs mean UK margins are razor thin.

I think the group has suffered both from some big structural challenges, but also from mistakes on the part of its management and this has hit the Royal Mail share price.

Management’s engagement with unions has been poor, which has held back everything else. Executive rewards have been weakly linked to performance. Moving away from letters, which are in terminal decline, has been too slow under successive CEOs too. Turnaround plans have been poorly implemented. And turnover of CEOs has been high, showing just how difficult these problems are to deal with.
The one bright spot for Royal Mail shares

I think investors looking for a turnaround will be relying on the international part of the delivery group. The GLS business for some time now has been the strongest part of Royal Mail, but growth there hasn’t been enough to arrest the falling share price.

Even if GLS continues to grow, I think Royal Mail shares have further to fall. Investors have lost confidence in this business and that will likely continue to hit the shares.


There’s a wider good news story around more e-commerce activity as a result of the pandemic, and as a result, more need for parcels delivery. But that doesn’t seem to be helping the group, even though it should be flying in an e-commerce-focused world. Overall, I don’t think the fundamentals look good and will avoid Royal Mail shares at all costs.

[wacko74]

None of these sites such as Motley above are independent, objective analysts offering impartial views and opinions... they're all nothing more than infomercial sites either paid or even sometimes run by hedge funds to ramp up or talk down any particular share price depending on what agenda that hedge fund has at any given time (long or short)