These are the most hated stocks in the UK so should you ditch them?

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FTSE 100 falling prices

No company wants to have the unenviable status as the most hated business in the country. Unfortunately, this is precisely the title that has been bestowed on Morrisons(LSE: MRW), Carillion(LSE: CLLN) and Ocado(LSE: OCDO) by short sellers.

These three companies are the most shorted stocks on the UK main market (excluding AIM). 

According to short interest data that's published daily by the Financial Conduct Authority, Carillion is the most shorted stock in the UK market with 21.4% of its shares out on loan to short sellers. Morrisons is the next most disliked company with 18.4% of its shares out on loan to short sellers while Ocado follows closely with a short interest of 17%.

Most investors would look at these figures and be scared away from the stocks. However, a high short interest is exactly what attracts contrarians, and such investment strategies have been shown to be lucrative when used consistently over the long term. 

So the question is, are any of these three companies attractive contrarian bets, or should you join in with the short sellers and bet against the businesses?

Swimming against the tide 

Morrisons' high short interest was justifiable earlier in the year as the company floundered, but today it's difficult to figure out why the market is betting against the group. 

At the beginning of November, the company reported its fourth consecutive quarter of like-for-like sales growth, underlying pre-tax profit rose 11% to £157m and net debt fell by £477m to £1.3bn, happily less than management's target of £1.4bn-£1.5bn in debt for the end of the fiscal year. The company is heading in the right direction, yet the shares look rather expensive. While earnings per share are expected to grow 36% this year, shares in Morrisons currently trade at a forward P/E of 20.7. Still, despite this lofty valuation its fundamentals are strong.

Carillion's fundamentals are also relatively impressive. As a construction business, it's exposed to cyclical construction trends, and it looks as if short sellers are betting that the company will struggle if the UK's economic growth grinds to a halt as it negotiates its divorce from the EU. But with the government committed to extra infrastructure spending, and a number of big-ticket infrastructure projects recently announced, it doesn't look as if this scenario will end up playing out. What's more, shares in Carillion are cheap. Shares in the company trade at a forward P/E of 7.4 and yield 7.4%. Another company I wouldn't bet against.

Overvalued 

Finally, Ocado is the one company that looks as if it might be overvalued. City analysts expect the company to generate a pre-tax profit of £11.5m this year on revenue of £1.3bn. Ocado's market capitalisation is just under £1.6bn and the shares currently trade at a forward P/E of 144. Also, even though Ocado has added £170m in revenue over the past 12 months, the company's pre-tax profit has fallen by £400,000.

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.


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