I follow short-selling data for two reasons. One, to know which Australian companies are in the bears’ sights, understand why and test their view against the bullish case.
Two, to identify positions that look wrong, knowing that good company news will force short-sellers to buy back the stock to cover an open short position, or close it out and book losses.
For the uninitiated, short-selling involves the sale of a security the short-seller has borrowed. When someone is “short” a stock, they expect its price to fall. For example, a trader borrows 1,000 shares, sells them at $30 and buys them back at $25, pocketing the difference.
Suffice to say, short-selling has higher risks and suits experienced traders.
Latest short-selling data shows poultry producer Ingham’s Group is the market’s most shorted stock. About 17% of Ingham’s stock is reported as a short position, according to the Short Positions Report Table from the Australian Securities and Investments Commission.
Galaxy Resources, Syrah Resources, JB Hi-Fi, Nufarm, NextDC, Metcash, Orocobre, BWX and Bellamy’s Australia round out the top 10 most shorted stocks.
Funeral operator Invocare is the market’s 13th most shorted stock. I outlined a bullish view on Invocare for the Switzer Report in January 2019 at $11.65. The stock rallied to almost $15 within four weeks of that story, before easing to $14.93. Short-sellers were squeezed, amplifying Invocare’s rally.
Invocare was a good example of identifying a quality company trading too far below its intrinsic value – and benefiting from short-sellers who got their idea wrong.
For clarity, the reported short position in Invocare was one of several factors that went into the idea. I would have identified the stock for this Report regardless of the short position and the prospect of quick price gains if short-sellers were forced to buy.
Also, plenty of savvy short-sellers (often local or US hedge funds) have good ideas. As analysts gush about a high-flying stock, the shorts are identifying holes in its earnings, governance or management credibility. It pays to understand when and why there is a large short position.
To my thinking, most stocks in the short-sellers table deserve their spot.
Retailers in short-sellers’ gaze
Unsurprisingly, retailers hold several spots in the top 30 short positions. JB Hi-Fi is fifth, Super Retail is 13th, Myer Holdings is 19th (what a short that was), Harvey Norman Holdings is 19th and Kogan.com is 23rd.
Don’t get Gerry Harvey started on short-sellers; some have had Harvey Norman in their sights for years over perceived reporting or governance shortcomings, and he detests them.
The retail sector is an obvious target for short-sellers. Retailing gloom abounds as commentators fear the house-price correction will cause consumers to feel less wealthy and more inclined to cut spending, so they can pay down debt. Other risks include Amazon’s effect on Australian retailers, growing online competition and rampant price discounting.
I’m not as bearish on the retail outlook as most commentators. To be sure, it’s tough in retail and likely to get tougher, amid immense structure and cyclical pressure on the industry. Selling cars, pricey furniture and fashion in this market is hard work.
Watch for more retailers to go bust this year and for listed property trusts with lower-quality shopping centres to be pressured. A lot of retail space will become vacant as Big W and other key anchors exit underperforming stores.
The key question is how much of the retail pain is already in share prices and whether the market is looking sufficiently forward, or focusing on current and past conditions. And if some retailers are better placed to weather the conditions, yet hurt by sector-wide sentiment.
Consider what’s ahead. The Federal election outcome in May will remove uncertainty and perhaps give people a bit more confidence to spend. It will follow the New South Wales election in March and return of the Berejiklian government, which should help confidence.
Both sides of Federal politics have promised billions of dollars of tax cuts and handouts. Millions of workers who earn $48,000 to $90,000 a year will benefit from a doubling of tax offset to up to $1,080-plus in their next tax return. A household with two people earning in that range will have a maximum $2,160 windfall in the next few months. On some estimates, $3.5 billion in hit the economy in the next few months from these tax cuts.
Economists estimate this return is equivalent to two 25 basis-point interest-rate cuts from the Reserve Bank of Australia, such is the potential stimulus. The fiscal handout might encourage the RBA to remain on hold with rates this year, although I expect at least one cut, probably in November as the budget stimulus fades and the reality of falling house prices returns.
The “cash splash” should give retailers a decent boost in the next six months. History shows many consumers spend their government handout on flat-screen TVs, gadgets and eating out – that is, on themselves as a treat rather than paying energy bills or their credit card.
At the same time, another rate cut this year will help retailers and slow the property downturn. I’m not suggesting a retail recovery is imminent. Far from it. Rather, there’s significant stimulus ahead in the next six months that will support JB Hi-Fi and select retailers.
Recent data supports this view. February retail trade figures, released earlier this month, showed 3.17% year-on-year growth and were better than expected. Don’t get too excited: seasonal factors and “one-offs” partly explain the result, but talk of retail “Armageddon” looks overdone. Particularly with record-low interest rates and solid jobs growth.
Amazon’s much-hyped arrival in Australia has so far not had the impact the bears feared. Only a fool would discount the Amazon threat to local retailing, but the market was initially too bearish.
Again, I’m not discounting the effect of sluggish wages growth, rising cost-of-living pressures and high household debt on retail stocks. My hunch is most will underperform the market over the next 12 months and only a handful of quality retailers will outperform.
My view on JB Hi-Fi (JBH)
I struggle with JB Hi-Fi’s ranking as the market’s fourth most shorted stock. Some bears I know have a short position in JB Hi-Fi based on an expected deterioration in retail and Amazon rapidly increasing its market share in electronic devices. The bears say JB Hi-Fi’s profit margins will fall as Amazon and local player Kogan.com increase their market share.
In fairness, the bears have been right on JB Hi-Fi in the past three years. From almost $30 in September 2016, JB Hi-Fi has fallen to $24.43.
In my view, JB Hi-Fi is one of the retail sector’s and stock market’s higher-quality mid-cap companies. It is superably leveraged to growth in electronic gadgets and its in-store service and price-matching strategy have it well placed to take on Amazon’s threat.
Against that, JB Hi-Fi’s Good Guys division could struggle if lower house prices affect white goods demand.
An average share-price target of $25.39, based on the consensus of 12 broking firms, suggests JB Hi-Fi is moderately undervalued at the current price. Macquarie Wealth Management has an outperform recommendation and $28.80 12-month price target.
If Macquarie is correct, JB Hi-Fi could deliver a 12-month total shareholder return (including dividends) of just over 20%. I’m not as bullish as Macquarie and favour the consensus view that JB Hi-Fi is moderately undervalued.
My hunch is the market will get more optimistic on JB Hi-Fi this year as it focuses on consumers who have an extra $1,000 and the potential to spend some of that income on electronic devices.
Kevin’s Rudd $900 handout during the Global Financial Crisis found its way to the retail sector and, sadly, some went to casinos and poker machines. John Howard’s 2004 Baby Bonus and tax cuts showed how even modest government lump-sum cases can boost retail sales, in that case buying flat-screen TVs, popular at the time.
If the tax bonus eases headwinds towards JB Hi-Fi and other quality retailers in the second half of 2019, short-sellers may be forced to cover their positions. The well-run JB Hi-Fi has an excellent market position, good record and habit of proving the short-sellers wrong, over time.
Chart 1 JB Hi-Fi
Tony Featherstone is a former managing editor of BRW, Shares and Personal Investor magazines. The information in this article should not be considered personal advice. It has been prepared without considering your objectives, financial situation or needs. Before acting on information in this article consider its appropriateness and accuracy, regarding your objectives, financial situation and needs. Do further research of your own and/or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at 9 April 2019.