Why has the share dropped., page-54

@donnyk01

You’re right, it’s intriguing. I, too, would be curious to read a “short case” for CGF, based on some rigorous valuation effort. But, I haven’t encountered such a thing yet, have you?

One thing I wouldn’t do is assume that whoever is shorting CGF must know something that you don’t, or must have done better due diligence than you have.

For, the possible reasons why some market participants are currently feeling bearish on CGF might be as simple (and superficial, I would add) as:

1) CGF is a “capital market derivative”; thus, if markets go down, CGF must go down even more.

2) Yields are going up, or will go up eventually, and CGF are full of bonds on their balance sheet; therefore, CGF stock must go down.

3) CGF have property on their balance sheet and property prices are about to collapse, so CGF stock must go down too.

4) CGF is a hybrid between a life insurer and a wealth manager, life insurers and wealth managers are under fire from the RC, hence the CGF share price must go down.

5) CIPRs are getting delayed and so will CGF’s expected revenue growth.

6) Foreign competitors will enter the Australian annuity market and steal market share, plus cannibalise margins in the sector.

7) CGF’s ROE is under pressure (from any of the drivers above), therefore CGF stock should trade at a lower premium to book value.

Can you see the common pattern behind all these reasons? All of them contain some degree of truth, but none of them actually tells you anything about what CGF’s fair value is.

And that, in my opinion, is the main point to consider. Because, in order for something to be a suitable candidate for short selling, it needs to be trading substantially above what is a sensible fair value range.

Whereas, in the case of CGF, my personal valuation effort (see for instance https://hotcopper.com.au/posts/35690033/single ) points to the stock price currently being comfortably below the lower bound.

Cheers