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Smurfit Kappa tops the shorting list on Irish stock exchange

Interest likely to die down in near future

Smurfit Kappa is about to embark on a major merger with WestRock to create a new company called Smurfit WestRock, which will have combined sales of about $34 billion

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Cantillon
Thu Feb 29 2024 - 06:00

The Financial Times’s Alphaville blog ran a column lately about the most shorted stocks around the world in an attempt to discern whether there was any particular patterns or insights.

A short, for background, is a trade in which a hedge fund or other investor borrows shares in a given company from a broker, sells them on the market, then waits for the price to fall so they can buy them cheaper and pocket the difference. It is, implicitly, a bet that a company’s shares will fall in value, and a risky one at that.

The FT’s trawling of the data produced some interesting findings, such as that Tokyo, Korea and Taiwan are the most popular venues for shorting, with more than 2 per cent of the total shares outstanding out on loan, while there were also high figures for the New York Stock Exchange, Stockholm and Toronto.

Among individual companies they concluded that Visa, the credit card company, is the world’s most shorted stock by value, with more than $105 billion (€97 billion) worth of its shares out on loan. (All Alphaville’s figures were converted to dollars.)

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While the world’s most shorted stock in absolute and relative terms was Nio, a Chinese electric car marker, with the equivalent of 94 per cent of its more than $11 billion (equivalent) share value.

Alphaville didn’t specifically make any reference to Ireland, but in the chart it compiled there was a figure for the total short figure for the Irish stock exchange, which showed that nearly $700 million worth of shares in Dublin were being shorted.

Curiously, the Central Bank’s register of net short positions tells a different story, showing total short trades of close to twice that value in recent days.

The overwhelming majority of that sum relates to just one company, Smurfit Kappa, where a swarm of hedge funds account for short trades against nearly 13.5 per cent of the company’s shares – the equivalent of €1.3 billion worth of shares currently being shorted.

However, none of that should be read as any particular commentary on Smurfit Kappa’s future performance. After all, the company is about to embark on a big merger with WestRock to create a new company called Smurfit WestRock, which will have combined sales of about $34 billion and annual profits in the region of $5.5 billion.

The shorting is far more likely to be a flurry of hedge funds engaged in merger arbitrage, a relatively complex set of trades designed to squeeze a bit of margin from stocks in the midst of big mergers.

All of which means there is a huge flurry of activity around the Irish Stock Exchange lately, and around Smurfit Kappa in particular, which is all likely to die down in the near future – and the short interest in Dublin along with it. Once you strip out the Smurfit Kappa effect, only two companies are being shorted on the Irish Stock Exchange: Kerry Group and Uniphar, well below the level of activity the FT identified in other markets.

Whether that is reflective of the strength of Irish stocks, or the fact that the Irish stock exchange has fallen off the radar of many traders, is a question for another day.

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