On 22 August 2011 the Top Ten Shorted Stocks on the ASX column on thebull.com showed Carsales.com Limited (CRZ) listed in the ninth position, with 5.96% of the total shares sold short; a slight increase over the previous reporting of 5.65%. The ASX website also tracks short sales by totals for the day and showed the turnover in CRZ shares for that day was 2,617,225; with 339.081 shares sold short, or 12.95% of the total volume for the day. As you know, short sellers profit when share price declines.
If you follow market news on a daily basis you might recall that CRZ reported earnings for fiscal year 2011 on 16 August – only a few days ago. Despite the impact of the tsunami in Japan on car inventories and a slowdown in consumer spending, CRZ beat earnings estimates. Here are a few relevant numbers from the financial release:
|Year End 30 June 2011||FY2010
|NPAT (Net Profit after Taxes)||43.2||58.3||35|
|EPS (Earnings per Share)||18.6 cents||25.0 cents||34|
|DPS (Dividends per Share)||14.9 cents||19.9 cents||34|
Considering this kind of performance, even in stiff winds, coupled with a solid dividend, why is CRZ still being sold short? Why don’t investors see CRZ as a defensive stalwart if economic conditions continue to deteriorate? A three month share price chart with a comparison against the ASX Information Technology Sector compounds the mystery:
CRZ’s closing share price on 23 August 2011 was $5.01. Its shares have been advancing nicely up the charts while the sector overall has failed to recover from the debt and deficit issues of the US and Europe. Why, therefore, are investors still betting CRZ is in for a fall?
Avid students of the history of share market investing know that fortunes can be made during the darkest days of market crashes. The strategies that enable the fortunate few to realise outsized returns are short-selling and, in the words of investor Nathan Rothschild, buy when there’s blood in the streets, even if the blood is your own.
“Blood-buying” is a long term strategy. Intrepid Australian investors who bought BHP at the beginning of the GFC paid around $22 per share; and even with the summer of 2011 downturn, BHP is trading around $38. American investors had the opportunity to buy global powerhouse Caterpillar (CAT) for around $25 and it is now trading around $85.
Much of the general public is blithely unaware investors can get very rich when things go down, not just when they go up. In the near term, short selling returns can be substantial, although risky. Newcomers to share market investing quickly learn the experts advise leaving short selling to the professionals. The mechanics of the strategy are simple. If you have reason to believe a share is headed for a significant downturn, you contact your broker and ask to sell the shares “short.” As an example, if you asked to short 100 shares of a share trading at $5, the broker would borrow the shares and deposit the sale proceeds into your account. At some point you have to buy back the shares to replace the borrowed shares.
The reward comes from buying the shares to replace those you borrowed – “covering your short” – at a much lower price. If the shares fall to $2 and you buy to cover, you keep the $300 difference. The risk is theoretically infinite. If you buy “long”, bankruptcy is your worst outcome and your total risk is the original $500 investment. If the share goes up instead of down, your risk grows and grows.
In some circles, short sellers have the reputation of being the “smartest guys in the room” since it takes considerable research to gauge substantial weakness in a share. However, short sellers can be wrong, especially when shorting shares because of general market conditions rather than because of fundamental weakness in the company.
Why would short sellers target CRZ? Although in reality it is an IT share, many investors view it as exclusively retail. Perhaps the shorts assume in the event of a GFC2 people will begin abandoning their cars by the side of the road and start walking to work.
The assumption of some short sellers appears to be that cars are discretionary items like clothing and electronics and sales going forward are in for a rough ride. In reality, cars are not discretionary; they are essential for living in the modern world. In hard times people still need to replace cars. In hard times, people may replace a $60,000 Mercedes Roadster with a cheaper car. In hard times, people may cut back from 2 cars to one. In hard times, used car sales increase.
If you take the time to review CRZ’s annual report to learn a few things about their business model, you will realise they generate the same revenue from a used car listing as they do from a new car listing.
Renewed competition is another possible reason short sellers may have set their sights on CRZ. News Corporation is in the process of jump starting Carsguide.com in an effort to grab market share from CRZ.
However, common sense says consumers will go where they can find the most choice, and right now that is carsales.com. Their market share is breathtaking. Here are a few excerpts from their recent financial release regarding their competitive position:
• 80% of all time spent looking at automotive classifieds websites around Australia was done on a carsales owned site.
• Page Impressions generated in June 2011 on the .mobile and iPhone applications were similar to those generated by the Fairfax, News Corp and Telstra Automotive Ad Networks desktop sites combined which highlights the speed in which this market is evolving.
• Consumers have downloaded more than 366,000 carsales iPhone/iPad applications since their launch last year and approaching 40,000downloads of our bike and marine applications.
Carsales.com has gone mobile and note that page impressions on their mobile applications alone were similar to the total desktop enquires from their major competitors combined. In addition, reading their annual report will reveal they introduced 21 new product offerings this year alone to match their existing Internet outlets. Here are their core sites:
1. Webpointclassifieds Pty Ltd
2. Equipment Research Group Pty Ltd
3. Discount Vehicles Australia Pty Ltd
4. Automotive Data Services Pty Ltd
5. Auto Information Limited New Zealand
6. Red Book Automotive Services (M) Sdn Bhd Malaysia Ordinary
7. Red Book Automotive Data Services (Beijing) Limited China Ordinary
8. Automotive Data Services (Thailand) Company Limited
Note they already have a presence throughout the Asia Pacific region, with plans to expand. Also note they provide business services to dealers, an additional income stream. What more could you ask for?
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