Retailer JB Hi-Fi was a top shorted stock for quite some time and then things changed. Last month the retailer reached a 52-week high, and shareholders rejoiced. Here is its 2-year price chart:
Short selling involves betting that a share price will go down, not up. It involves borrowing shares at a given price with the intention of buying the shares at a lower price sometime down the track. Putting it simply, if you short 100 shares of ABC Company at $15 and it drops to $10, you buy the shares and keep the $5 per share difference as profit.
The problem with shorting is that the risk is infinite. Eventually the borrower has to cover and buy the stock at what could be a huge difference. A “short squeeze” happens when shorts get squeezed by a stock on an upward roll with no signs of slowing. Sometimes short sellers get it wrong, like what happened with JB Hi Fi.
So if they were wrong about JBH, could they be wrong about other stocks sitting on the ASX Top Ten Shorted Stocks list?
The table below includes the top ten shorts as at 30 September 2013. The list includes shorts with more than 10% short interest, which means that more than 10% of the total shares outstanding have been borrowed to short. Nine of the ten meet that criterion. Number 10 on the list, Metcash Limited (MTS), has a short interest of 9.86%.
The table includes some valuation measures and performance indicators that might help to spot a potential JBH.
|Code||% Short Interest||52 Wk % Share Price Change||Forward PÉ||P/B||Dividend Yield||2 Yr Earnings Growth Forecast||Gearing|
|Myer Holdings Ltd||MYR||14.35%||+40%||11.64||1.69||6.7%||-2%||46.7%|
|Fairfax Media Ltd||FXJ||13.35%||+17%||11.1||0.72||3.65||62.3%||38.84%|
|Monadelphous Group Ltd||MND||13.21%||-8%||13.25||5.61||7%||-9.1%||17.9%|
|Cabcharge Australia Ltd||CAB||11.12%||-35%||7.53||1.3||8.6%||0.1%||58.29%|
|David Jones Ltd||DJS||10.8%||+12%||15.05||1.92||5.9%||3.1%||12.6%|
|Western Areas Ltd||WSA||10.66%||-38%||11.24||2.3||0.8%||249.8%||89%|
|Transfield Services Limited|
Clearly, there’s considerable uncertainty surrounding retailer Myer Holdings Ltd (MYR); the stock scores the highest year over year price appreciation despite being the most shorted stock on the ASX.
Based on earnings forecasts the following stocks look promising; Western Areas Ltd (WSA), at 249.8%, Fairfax (FXJ), at 62.3% and Transfield Services Ltd (TSE), with earnings forecasts of 50.8% over two years.
But these are forecasts only, which can be off the mark. So what do analysts think? Are they uniformly bearish, providing some corroboration for the high short interest; or do some disagree? The following table summarises recent analyst recommendations from 8 investment houses:
|CIMB Securities||Neutral||Outperform||Neutral (Downgrade from Outperform)||Under-perform||Underperform (Downgrade from Neutral)||Neutral||Under-perform||NA||Neutral|
(Downgrade from NEUTRAL)
|Deutsche Bank||Buy||Hold||Sell||Sell (Downgrade from Hold)||Hold||Sell||Sell||Sell||Hold|
|JP Morgan||Under-weight||Under-weight||Under-weight||Neutral||Neutral||Under-weight||Under-weight||NA||Underweight (Downgrade from Neutral)|
(Upgrade from Neutral)
It would appear Western Areas, with three bullish recommendations, two neutrals, and one sell, is worth investigating. Thomson/First Call reports 14 analysts covering WSA with 6 Buys and Strong Buys; 6 Holds; and 2 Sells.
Western Areas is primarily a nickel miner with a market cap of $553 million. The biggest issue here is the company’s gearing levels (be warned). The company’s revenues and profits have declined in each of the last three years and its total debt as of the most recent quarter stands at $217 million with $80 million total cash. Western Areas is based in Perth and its two premier assets, the Flying Fox and Spotted Quoll mines, have the highest grade nickel on the planet.
However the big risks are commodity prices, future demand, and the company’s debt. Unless nickel prices rebound the company’s plans for expanding production capacity at its two high-flying mines may require additional funding.
Fairfax Media publishes newspapers and magazines and owns major radio broadcasting operations.
CIMB Securities is alone among major analysts with a bullish outlook on Fairfax, citing strong growth from some of the company’s online assets. Thomson/First Call notes 3 analysts with Buy ratings, 3 with Hold, and 5 with underperform. Declining advertising revenue is the big risk here.
And then there’s construction services provider Transfield Services, a company whose expansion plans have either been curtailed or disappeared across resources and energy. It must be noted, however, that Transfield also generates revenue from ongoing maintenance and operations activities and has assets in the property and defense sectors. In addition, the company has strong expertise in infrastructure development and could benefit from the new government’s plans for infrastructure spending. Transfield’s Forward P/E and Price to Book ratios suggest this might be one to surprise the shorts.
UGL Limited (UGL) is another services company that has suffered from uncertainty surrounding its upcoming projects, although analysts see positive growth of 21% over the next two years. The share price of UGL has mirrored that of TSE over the last two painful years. Here is the chart:
UGL is fraught with uncertainty due to potentially splitting off the company’s property and engineering operations. Bears and short-sellers feast on uncertainty.
Another major services provider, Monadelphous Group Limited (MND) along with medical device provider Cochlear Limited (COH) were once darlings of the ASX. Love affairs can be tumultuous as a one year price for these two stocks shows.
Monadelphous reported record revenues and profits in its 02 September earnings release. A few days later the company announced a new $235 contract with Rio Tinto for a variety of services related to the expansion of Rio’s production capacity at one of its mines. However, many analysts are wary of MND, and so too are short-sellers. Deutsche Bank, Citi, and UBS are all decidedly bearish and Thomson/First Call reports a total of nine analysts with Underperform or Sell recommendations.
Cochlear was seemingly on track to become the first ASX stock to break the $100 per share mark, but then a disastrous product recall intervened. Cochlear had a stranglehold on the hearing aid market with its high-end devices but the recall began what now appears to be an uninterrupted trend of increasing competition. What’s worse, many of the more recent competitive offerings are priced lower than Cochlear products. While Cochlear stands to benefit from the fall in the Aussie dollar, few analysts see positive growth for COH in the near to medium term and the short sellers agree. Both may be right on this one.
Cabcharge Australia Limited (CAB) is another company that has had glory days on the ASX but has seen a steady decline that actually began before the GFC. Here is a ten year price chart:
The Victorian taxi inquiry could spell major trouble for Cabcharge. Deutsche Bank cites the real possibility other states will follow with their own regulatory changes.
The final two companies are retailers Myers Holdings (MYR) and David Jones (DJS). Both are positive year over year, benefiting from a rally in the retail sector in the first quarter of 2013. That rally ended as concerns about consumer spending and retail sales mounted. The picture is vastly different for MYR and DJS over the last six months. Here is the price chart.
Latest figures show weakening retail sales with department stores suffering the most. Myers and David Jones are both department stores although Myers is more diversified. On occasion, short-sellers and others with bearish sentiment tend to lump similar stocks together without recognising some of the strong points of individual companies.
Myers holds the title of the most shorted stock. Despite this, Deutsche Bank reiterated its Buy recommendation for Myers shares on 02 October. DB thinks Myers is the cheapest discretionary stock on the ASX and its low Forward P/E of 11.64 and P/B of 1.69 would seem to confirm the view. No major analysts have a bullish outlook on David Jones, but the company shares some common features with Myers that make both potential candidates for the title of the next JB Hi-Fi.
Both of these companies have strong management executing turnaround plans that could pay off handsomely in the longer term. Both are making major strides in improving online sales capability. Myers is looking to expand its branded product identification. On 18 September the company announced the addition of Peter Alexander Sleepwear to its product offerings beginning in February 2014. David Jones just added Australian designer Nicola Finetti to its stable, joining other recent additions Sunseeker, Simona, Gumboots, Givenchy, Pucci, and Laura Mercier. Times may be tough for retail in Australia, but these two companies are not standing still.
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