Rudi’s View: Yet Another Short Selling Failure

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In this week's Weekly Insights:

-Yet Another Short Selling Failure
-February: Early Days, Full Of Promise
-A Different Environment For Dividends
-FNArena Webinar

By Rudi Filapek-Vandyck, Editor FNArena

Yet Another Short Selling Failure

Short sellers. They present themselves as the shining white knights if not the morally-driven, diligent sleuths who dig into the finer details of how companies operate and communicate with their investors, with the sole aim of uncovering fraud and management misdemeanors, because investors are best served by honesty and transparency, and somebody needs to do the dirty work when others are simply looking to promote the next pump & dump opportunity.

Great theory. And there have been a few excellent examples, both domestic and overseas, of short sellers uncovering the fraud when nobody else did. Blue Sky Alternative Investments springs to mind, as does failed sandalwood grower and marketer Quintis.

But a much larger number of companies have been targeted mostly via overseas domiciled researchers keen to inform their hedge fund clientele first and then releasing their accusatory research upon the masses. Helped by the fact this is usually a well-prepared, organised gang-attack, the initial result tends to be a sharp fall in the target's share price.

From Macquarie Group and Fortescue Metals a little further down memory lane, to Amcor, Credit Corp, Corporate Travel, Rural Funds Group, Seek, TechnologyOne, Tyro Payments, and WiseTech Global in more recent times; all have been subjected to such an attack from foreign short sellers research, but with quite the mixed outcomes.

Among the recent attacks, shares in Tyro Payments have yet to recover, while TechnologyOne is well off its low but also still at a distance from the top, and Seek shares are setting new all-time highs, having dipped only briefly back in late October-early November.

First observation: while in some cases legitimate questions have been raised, most share prices recover over time and shake off the bad smell that automatically comes with the short sellers accusations, amid broad media coverage and a falling share price. There are always multiple factors in play, in particular over a longer time-frame, but one is hard pressed to find any lingering impact in today's share price of, say, Rural Funds Group, or Credit Corp, or Amcor.

Equally important: while not every accusation and attack is swiftly dealt with or decisively debunked, through the courts or otherwise, none of these targeted companies have since been uncovered as being fraudulent in their operations, accountancy, or otherwise.

I also note that, with the exception of Tyro Payments for which the market is undoubtedly awaiting the next update on technology failure and remediation put in place, the negative impact on share prices is becoming shallower and shorter. At the same time, those familiar with the companies involved are increasingly labeling the research released to inspire such attacks as "low quality", "nothing new" and "factually incorrect".

Last year, those were the key words used in response to GMT research, not necessarily by the company under attack (TechnologyOne), but by domestic analysts familiar with the company and the sector. Same words re-appeared when local media were seeking qualified responses to Blue Orca's attack on Seek.

Last week, J Capital launched an attack on small cap local technology company, Nearmap ((NEA)), and despite JCap's marketing efforts beforehand to gather as much anticipation and impact as possible, it has proved quite the disappointing exercise, mostly for the short sellers who jumped on the bandwagon while -no doubt- expecting another easy clobber-them-handsomely knee-jerk group exercise before anyone starts asking questions.

Nearmap is a not well known, former high flyer, that is not profitable, had a few operational hiccups in years past, and with lots of question marks surrounding its expansion into the US market. At first glance, that seems like a rather easy bounty to target, similar as with Credit Corp, Rural Funds Group and TechnologyOne in the past.

Only this time, things have gone pear shaped quite quickly. Also because of how the company under attack has responded to the many short sellers allegations. Once the share price started weakening, and the company became aware of JCap's report, it simply asked the ASX to halt trading in its shares, which was granted.

Then it pulled forward (by two days) the release of its interim financials, together with presentation slides, an analyst pack, detailed commentary on the financials, plus a dedicated rebuttal of the accusations made in the short sellers report.

We can all argue about this and that until the cows come home, and without finding any concrete answers, but I think Monday's share price response tells the tale: JCap's attack has been found wanting, and short sellers have, at least in part, abandoned their strategy and covered in order to minimise potential losses. In case you are not aware, Nearmap shares surged just under 19% on the day to $2.57, their highest level since November last year.

And as I have been fortunate to read through some of the early responses from some analysts whose daily job it is to monitor and research this little company, the released performance numbers did not reveal a "blow-me-out-of-the-park" performance from the company. They were simply good enough to show investors that JCap's case was built on quicksand. Faulty research. Misguided accusations. Call it what you want.

So here's the irony. In a share market that is deemed extremely well-priced, if not grossly overvalued, by many a market observer, the industry whose raison d'etre consists of uncovering fraud and investor deception is increasingly being unmasked as publishers of low-quality, faulty research aimed at uninformed, flighty investors who'd be willing to sell first and ask questions later.

Nearmap was once upon a time part of my selection of local technology companies that deserved investor attention. For a short time it even featured in the All-Weather Model Portfolio. In the current context, I believe the company, given it is unprofitable, with many question marks and execution uncertainties, remains too risky for my appetite.

But on the swift and decisive response to the JCap organised attack, I'd say well done Nearmap. Truly impressive. Let's hope a few nasties got burned really heavily, and they direct their disappointment back at the source of the report.

Serves them well.

February: Early Days, Full Of promise

By Rudi Filapek-Vandyck, Editor FNArena

Only in Australia, I think, can one be in the middle of reporting season, calendar-wise, but with only one-sixth of all companies having reported.

Or to put this in more concrete terms: by early March, when the current February corporate reporting will be done and dusted, FNArena expects to have updated on circa 318 ASX-listed companies.

Today, as I write this week's Weekly Insights, February 15th, the total number of companies included in our daily Corporate Results Monitor still only tallies 52 companies.

I think everybody can do the math. There are more than 260 corporate results still waiting to be released, ex quarterly trading updates such as from the banks outside of CommBank ((CBA)) and Bendigo and Adelaide Bank ((BEN)), and ex the handful of companies that reported on Monday, today, and whose general assessment will be included in tomorrow's Monitor update.

No, I have no clue either, other than that the skew towards the second half of each reporting season in Australia has noticeably worsened in recent years. This skew seemed logical when businesses were under the pump, forced to cut dividends and issue profit warnings, as they found it increasingly more difficult to live up to market expectations.

We should be edging closer to 100 by now, on pre-2019 schedules, but maybe Australian companies are simply finding it difficult to change the new habit?

Whatever the reason, investors will find out what is going on inside corporate Australia over the next two weeks. So far, the early numbers look very promising with the percentage of market beating financial results at roughly 55% and the percentage of clear disappointments at around 15.5%.

To put these numbers in context: total "misses" since August 2013 have never been below 19% and usually are in the low to middle 20s range while the best reporting seasons, September-December last year and March prior, generated exceptional numbers of 49% and 43% respectively.

It's still looking very promising, but we have to take into account that on 52 companies thus far only, and with more than 260 yet to follow, today's statistics can change quite dramatically. One observation to make is that some of yesteryear's favourites are genuinely facing a much tougher environment in 2021 (see: Altium ((ALU)) on Monday) while negative secular trends remain the bugbear for owners of shopping malls and office properties, see Mirvac Group ((MGR)) and Unibail-Rodamco-Westfield ((URW)).

In between, a large number of companies are performing better-than-expected, forcing analysts' forecasts higher. At least, this is the picture for the first two weeks of this February, on a thinner than usual sample.

A Different Environment For Dividends

The addition of Telstra ((TLS)) shares to the FNArena-Vested Equities All-Weather Model Portfolio has led to a number of questions from readers and subscribers.

It is true, I am usually not a big fan of investing in low quality propositions, much preferring to avoid getting caught in something like Unibail-Rodamco-Westfield ((URW)) and then hearing management declare there will be no dividend for years to follow. Telstra shares have caused many a loyal shareholder continuous headaches for extended periods since its listing in the late 1990s.

As I have tried to explain since returning from the end-of-year break in January, this year's prospect of rising global bond yields will have a direct impact on bond proxies and share prices of many an income providing stock in the share market. As such, it is my forecast that financials and industrials that are in a position to grow their earnings and dividends will prove a much better investment than most property owners or your typical REIT.

Following on from this forecast, the All-Weather Portfolio has reshuffled its exposure to dividend paying stocks, adding Telstra and Super Retail ((SUL)) while sticking with Aventus Group ((AVN)) and Waypoint REIT ((WPR)). Aventus Group has continued to perform strongly, while Waypoint REIT has clearly been impacted by the rise in global yields.

Investors should also note many of the stocks held in the portfolio are regular and solid providers of growing dividends, including Amcor ((AMC)), Iress ((IRE)) and Coles ((COL)) while, of course, the likes of CSL ((CSL)), ResMed ((RMD)), TechnologyOne ((TNE)) and REA Group ((REA)) equally pay out growing dividends, though their yields are too low to feature in any specific dividend-oriented investment strategy.

Telstra's inclusion might well prove but a temporary decision, in that I believe the prospect of selling off equity in its towers and other infrastructure assets is minimising risk and most likely to unleash value for shareholders. It is on this specific consideration that Telstra is temporarily back in the portfolio, offering circa 4.7% yield after the recent share price appreciation. Lucky me, also, Telstra's financial interim performance did not disappoint this time around.

The inclusion of Super Retail adds a high yielding stock that should be supported by the prospect of a prolonged period of buoyant consumer-related spending while, admittedly, also creating some overlap with one of my long-standing favourites, Bapcor ((BAP)).

As far as the All-Weather Model Portfolio itself is concerned, this is something we set up with a financial partner on an external platform (now: Wealth O2), so no specific details are available on the FNArena website. The Portfolio chooses from the same lists that are available through the dedicated All-Weather Stocks section on the website. It owns most, though not all of the stocks mentioned.

Sometimes an exception is made, as with Telstra and Super Retail, stocks that wouldn't feature on my lists. I haven't as yet figured out how best to communicate this switch in focus when it comes to dividend stocks, other than mentioning it here in Weekly Insights.

Suffice to say, while the five names mentioned under Dividend Champions on the website will continue to pay out dividends, and grow those dividends over the years ahead, with low risk of having to reduce or scrap payouts, they are unlikely to perform well if bond yields keep tilting higher.

This is the one perspective investors should simply be aware of.

For more details about the All-Weather Portfolio, send an email to info@fnarena.com

FNArena Webinar

FNArena organised an online webinar on Monday last week with myself providing an introduction to the website and service provided, followed by a general update on financial markets in early 2021.

Two recordings from the event have been added to the FNArena Talks section on the website:

-First part (30 minutes) consists of a general overview to the FNArena website and the service provided, helping subscribers to maximise their usage and benefits;

-Second part (30 minutes) provides an assessment of what is happening in financial markets, why, and a deeper look into the February reporting season.

To visit FNArena Talks: https://www.fnarena.com/index.php/analysis-data/fnarena-talks/

For Part I: https://www.fnarena.com/index.php/2021/02/11/rudis-view-february-feeding-market-optimism/

(This story was written on Monday 15th February, 2021. It was published on the day in the form of an email to paying subscribers, and again on Thursday as a story on the website).

In addition, since FNArena runs a Model Portfolio based upon my research on All-Weather Performers it is more than likely that stocks mentioned are included in this Model Portfolio. For all questions about this: info@fnarena.com or via the direct messaging system on the website).

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