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Short sellers get smashed

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By Paul Rickard

This week’s rally in the leading retail stocks is great news for investors, and a blow to the short sellers. Finally, these professional investors are wearing some of their own medicine.

Over the last three days, JB Hi-Fi has added 8.4% to close yesterday at $25.35, Harvey Norman is up by 3.5% and Super Retail Group is 2.1% higher. Even department store disaster Myer has put on 2.0%.

There is nothing like a short covering rally to separate “the men from the boys,” and when they happen, they can be pretty ferocious. And this is exactly what we’ve seen.

What triggered the rally? 

Firstly, Amazon arrived……………and didn’t conquer. After so much fanfare, it finally launched its Australian website on Tuesday with 17 categories of goods ranging from clothes to electrical items. But this underwhelmed most analysts because the range is patchy, and the pricing variable. Some items were cheaper than Amazon’s bricks and mortar (and increasingly online) competitors, other items were more expensive.

Further, Amazon’s much lauded logistical and delivery systems knowhow isn’t on display with the Australian offer. Sure, you can get free delivery if you order goods worth more than $49, but this translates to a wait of three to 7 business days if you live in one of the capital cities. In the bush, it is seven to 10 business days. And if you pay $9.99 per order for “priority” delivery in Sydney, Melbourne or Brisbane, it will largely be next day delivery rather than same day delivery. Hardly ground breaking. Hardly disruptive.

Amazon Australia Delivery Schedule and Cost

Source: Amazon

Overall, Amazon’s debut offer was considered to be a bit “lame”.

The other factor that drove the short covering rally was a surprise jump in retail turnover of 0.5% for the month of October. This came after a very tough period for retailers, and suggests that in the lead up to the critical Christmas holiday period, consumers may be ready to open their wallets a touch.

These two factors were enough to drive the short sellers to take some cover. Unfortunately, we won’t know for some days just how many short positions were covered, as ASIC reporting on short sales is still woefully behind the market action. The latest report from ASIC shows that a staggering 17.4m JB Hi-Fi shares worth around $440m are sold short. This represents 15.14% of the total number of JB Hi Fi shares on issue - roughly 1 in 6. For Harvey Norman, 9.48% of the shares have been sold short, while the position in Super Retail is 5.36%.

What do the brokers say

The brokers are still cautious on the retailers. They know that Amazon will ramp up its offer, launch Amazon Prime, and innovate to attract customers. Even if it doesn’t win that much market share, the presence of Amazon will keep downward pressure on prices and hurt operating margins for the existing retailers.

According to FN Arena, JB Hi-Fi, Harvey Norman and Myer are fully priced. The consensus broker target price for JB Hi- Fi is $24.58, 3% below its closing price yesterday. Only Super Retail has upside to its target price.

Buy recommendations are hard to find. Myer doesn’t have any, while JB Hi-Fi has one (with 5 neutrals and 2 sell recommendations). On multiples, the major retailers are cheap, trading around 12 times forecast FY18 earnings and 11.5 times forecast FY19 earnings. Yields are over 5%.

Broker Recommendations/Forecasts


Bottom Line

The short covering rally came earlier and was stronger than I had expected. I think there is value in the retailers, but investors can afford to be patient as it is unlikely that the short sellers have given up. These guys have deep pockets and know that the “Amazon scare” has further to play out. 

And I would specifically exclude Myer from any buy list. At the right price, it is JB Hi-Fi or Super Retail for me.

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Published: Thursday, December 07, 2017

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