...this is another problem in modern day markets. Shorting. If market participants cannot make money going long, they start going short. Making this market no more than a betting game and a casino. So Buy and Hold investors may wonder what really is going on with their stock prices.
...Never agreed with shorts on any particular stock, and I have never shorted any in my life. If I wanted to be bearish, I just buy BBUS/BBOZ, which is kind of short the general market. So anything featured badly about any particular stock in this thread has nothing to do with a short agenda.
Short sellers raise bets against ASX retailers, lithium plays
Tom Richardson
Jul 11, 2022 – 2.03pm
Traders are lifting bets on pandemic-era sharemarket darlings tumbling in value as surging cost inflation and receding household wealth threatens to deliver a whipsaw earnings season next month.
The violent macroeconomic shift has left analysts scrambling to update profit forecasts for financial 2023, and short sellers lining up their ducks as ASX companies risk missing guidance.
Jack Dorsey of Block, left, and Anthony Eisen and Nicholas Molnar of Afterpay. Nearly 10 per cent of its stock is now shorted. AFR
In Australia, e-commerce and retail businesses JB Hi-Fi, Temple & Webster, Redbubble, Kogan and former market superstar Afterpay-owner Block have 5 per cent, 6 per cent, 4 per cent, 8 per cent and 10 per cent of their scrip shorted respectively, according to ASIC’s latest data.
Hedge funds are betting on the retailers disappointing as the Reserve Bank warns inflation may reach 7 per cent in 2022, and traders expect interest rates to reach 3.2 per cent in a wild macro-economic reversal yet to spillover into corporate profit guidance.
In June, broker UBS slashed its average profit forecasts for retailers by 23 per cent in financial 2023, with house prices tipped to decline more than 10 per cent.
Retail businesses are popular targets for short sellers as inflation equals rising labour, supply chain, manufacturing and input costs at the same time as consumer confidence sinks.
From July, minimum wage costs jumped 5.2 per cent including retail awards, with employees on industry awards offered at least a 4.6 per cent rise by the Fair Work Commission.
Physical store and online lighting retailer Adairs currently has 6 per cent of its shares shorted, despite the stock falling 41 per cent over the past year.
In June UBS cut its financial 2023 sales forecasts for Adairs by 7 per cent, which translated into a 23 per cent fall in earnings per share estimates, and 29 per cent share price target reduction.
The forecast for a far wider fall in profits than sales shows how declining margins on rising costs spell trouble for the consumer discretionary sector.
In a competitive environment, many retailers traditionally operate on low gross profit margins, which leaves them vulnerable to an inflation-driven increase in their cost of goods sold or COGS.
If it costs a business $60 to manufacture or source a product it sells for $100, a 10 per cent cost inflation rise to $66 hurts margins more than for a business that has a $30 COGS and $100 sale price.
Passing the inflation costs on to consumers also becomes harder for companies with lower gross margins. In the example above, the first business would need to increase checkout prices by 6 per cent to maintain its margin, with the superior business needing to push through just a 3 per cent price increase.
On Monday, broker Citi axed its price target on Domino’s Pizza from $100.95 to $92.95 and warned Domino’s must either absorb the rising food COGS itself, or try to pass it through to franchisees.
Citi also said inflation is impacting consumer demand in Europe and Australia, with Domino’s slapping a 6 per cent delivery fee on online orders in Australia last week to cover rising costs.
Domino’s shares fell 4.6 per cent on Monday, with more than 3 million shorted equal to 3.6 per cent of the budget pizza maker’s register.
Hedge funds versus lithium fans
It would be remiss not to highlight speculative lithium explorers as another heavily shorted sector especially popular among young investors keen to buy anything boasting an electric vehicle theme.
Recent S&P/ASX 200 entrants Lake Resources and Core Lithium have 9 per cent and 7.7 per cent of their shares shorted, respectively.
Morningstar said short interest in the pre-revenue duo doubled over June as professional hedge funds bet against retail investors.
Europe-focused lithium explorer Vulcan Energy has 6 per cent of its shares shorted and, like Lake Resources, claims it can extract lithium directly by using technologies as yet unproven at commercial scale.
Morningstar also said short interest in AVZ Minerals is up an incredible eight times since March. Shares in the lithium play are suspended amid a legal dispute over ownership rights to its Manono tenement in the Congo.
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