Short interest in J Sainsbury plc (LON:SBRY) has been on the rise since the new year kicked in, and especially picked up pace over the last couple of weeks. The grocery retailer is one of the U.K’s largest supermarket stores, which is competing with the likes of Tesco PLC (LON:TSCO) and Wm. Morrison Supermarkets plc (LON:MRW).

Shortsellers are predicting Sainsbury’s fall, others still bullish

Short interest in J Sainsbury plc (LON:SBRY) is up from 3.47% at the end of 2013 to 5.7% as of now, a total of seven fund managers are betting on the short side of Sainsbury. Bets against Sainsbury did well in the past week as shares of the retailer fell nearly 8% in the last 5 trading sessions.

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Picture title: Short Interest in J Sainsbury

Caption: Source shorttracker.co.uk

Analysts and investors have conflicting views on how Sainsbury is going to perform this year. According to a recent survey conducted by The Telegraph which polled 200 fund managers, the consensus was that Sainsbury is most capable of emerging as the winner in the current competition among U.K’s supermarket stores. These are tough times for grocery retail market in the U.K anyway, as an upcoming price war has instilled fear of eroding profit margins in the industry.

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Chart via Novus Research

Contrary to what the majority of managers think, Jefferies is expecting a 2.5% fall in sales when the retailer releases trading numbers tomorrow. Moreover, the latest from Jefferies also finds that Sainsbury is most vulnerable to the upcoming price war, as cheaper German brands Aldi and Lidl establish business in the U.K. The consensus forecast of ~3% decline in sales growth would break a streak of 36 straight quarters of increase in like-for-like sales. The retailer barely managed to report a 0.2% increase in sales during the Christmas season last year.

Sainsbury responsible for its own destiny: Bernstein

On the other hand, Bernstein Research remains bullish on the company, and the analysts believe that the concern over competition in the industry has been over-hyped. Sainsbury’s past record has proved that the company has a differentiated style of marketing and selling its products, and will continue to take market share from Tesco PLC (LON:TSCO) and Wm. Morrison Supermarkets (LON:MRW). Bernstein believes that Sainsbury’s sales are not as dependent on Tesco and others as the market assumes. The analysts also refute the popular opinion that Justin King’s retirement means that the best is over, Bernstein counters that this is simply a transition at the executive level which companies need to go through.

King has served as the CEO of Sainsbury for 10 years, and would be replaced by Mike Coupe. A contrasting view to Bernstein’s analysis of King’s retirement was given by Premier Asset Management. Chris White, head of equities at PAM said to Telegraph:

“Tesco, the market leader, recently abandoned its margin target and committed £200m to reducing prices. With the lowest margins in the sector, Sainsbury’s would be hit particularly hard if forced to follow. The best CEOs have a knack of getting out at the right time. Tesco’s Sir Terry Leahy and Manchester United’s Sir Alex Ferguson are both perfect examples. Justin King might just be another.”

Shortsellers – Wm. Morrison and Tesco faced with declining market share

Wm. Morrison Supermarkets (LON:MRW) has committed $1 billion to combat pressure from cheaper retailers, and the company is also in the process of selling 500 million worth of properties. Shares of Wm. Morrison Supermarkets (LON:MRW) fell 11% in the past week, as it reported disappointing numbers for the fourth quarter of 2013. Somewhat similar luck hit Tesco PLC (LON:TSCO), whose stock lost nearly 7% of its value in the past week. Tesco is currently facing its lowest market share in a decade and its investors are looking at the company to execute a strategy to counter the looming price war.

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Chart via Novus Research

Shortsellers take profits as shares fall

Some of the famous hedge funds who are betting against Sainsbury include Stephen Mandel’s Lone Pine Capital, Lansdowne Partners, Odey Asset Management and most recently Lee Anislie’s Maverick Capital. The largest shorts are held by Lansdowne Partners, 1.92% and Pelham Long Short Master Fund, 1.1%.

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Meanwhile short interest in Wm. Morrsion is up to 4.65% of outstanding shares. The company is facing negative sentiment from a similar group of shortsellers, including Lone Pine Capital, Lansdowne Partners and Pelham Long Short Master Fund. Lansdowne Partners is the only fund with a public short in Tesco, the fund has maintained a 0.7% bet against the company for a more than a year. Since Tesco PLC (LON:TSCO) has a market cap which is many times of its competitors, it is entirely possible that there are other negative bets which have not made to the threshold level to be publicly declared.

Not everyone agrees with the shortsellers

While shortsellers are hounding these supermarket chains, there are still many who are very interested in buying up positions here. An investment consortium belonging to Qatar holds a 25% stake in J Sainsbury plc (LON:SBRY) and has tabled takeover bids in the past which were rejected by the company. There are rumors that the Qatari Investment Authority could once again bid for the grocery retailer. At the same time the famed activist investor, Paul Singer, has put pressure on Wm. Morrison Supermarkets plc (LON:MRW) to sell its property business. Singer’s Elliott Management and Sandell Asset Management both hold positions in the company.