Harvey Norman Holdings Limited (ASX: HVN) has won the unfortunate prize of potentially being the most expensive stock in the world. An entry on the company was voted the best in a competition run by website SumZero aimed to find the best company in the world to 'short'.
Investors 'short' stocks when they believe the share price will fall over the short or long term. The process involves 'borrowing' shares held by someone else, selling them on-market, and then buying them back when they fall in price. The 'shorter', therefore keeps the difference between the sale and purchase price, less any costs.
Singapore-based APS Management analysts' identified Harvey Norman as a great company to short based on some key observations:
- Harvey Norman faces stiff headwinds in the retail sector from online and local discount competitors;
- Poor financial disclosure to shareholders, including a lack of breakdown of store performance;
- A low-growth environment generated by a slow Australian economy;
- The unique franchising arrangement whereby franchisees pay no upfront costs, receive a salary and leased car, and are offered 'tactical support' by the company if the store underperforms;
- The poor performance of the company's overseas stores in Ireland, Singapore and Malaysia, which lose millions of dollars per year;
- A poor history of acquisitions (Clive Peeters); and
- Uncertainty of the underlying reasons for supporting franchisees.
The analysts were most concerned about the 'tactical support' paid to franchisees. The payments ensure that Harvey Norman owned properties are consistently leased (by Harvey Norman franchises). It is believed that this increases the group's property portfolio value, which supports further borrowing.
The report estimated that a 35-40% fall in the share price to around $2.20 is possible over the next 24 months. Incidentally this value is actually higher than the value placed on the company by some prominent Australian analysts. In their view, Harvey Norman lacks any competitive advantage over peers and will be one of the first retailers to suffer if the housing market slows.
