Short selling a share involves making a bet that the price of that share will decrease in the future.
Short selling can be used for both speculation and hedging, and can provide an opportunity to make profits in declining or sideways markets. But short selling is not a strategy used by the majority of investors, largely due to the expectation that shares will rise in price over the medium to long term.
A short seller borrows shares and sells them. Later, the short seller will have to buy the shares to return them to the lender. If the price of the shares has declined the short seller makes money. Short selling is risky as losses are potentially unlimited – if share prices increase, the short seller will be out of pocket the amount of the increase.
Selling a share short makes sense when there is good reason to believe the price of shares will fall. This may occur when a company is experiencing difficulties such as increased competition, challenging trading conditions or structural changes in their industry, and certain ASX shares tend to be sold short more than others.
Here we take a look at 3 ASX shares that topped short-seller lists in 2019.
Domino's Pizza Enterprises Limited (ASX: DMP)
Dominos has frequently been featured in the top 20 most short sold ASX shares in 2019. More than 10% of Dominos shares are currently sold short. Despite this, Dominos shares climbed over 30% in 2019 and are currently trading at $54.03 up from $41.22 last January.
Dominos operates Australia's largest pizza chain comprising both franchisee-owned and company-owned stores. Internationally, Domino's owns the Domino's operations in Japan, France, Germany, Netherlands, Belgium, Luxembourg, and Denmark. FY19 results were strong with network sales up 11.9% to $2,897 million and online sales up 18.2% to $1.943 million.
Revenue in FY19 increased by 24.4% to $1,435 million. Underlying net profit after tax (NPAT) increased 6.1% to $141.2 million and earnings per share were 165 cents, up 8%. Domino's underlying earnings per share have grown at a compound annual growth rate of 22.5% over 10 years. A full year dividend of 125.5 cents per share was paid, up 7.1% on the prior year.
Domino's boasted a network of 2,522 stores at the end of FY19. Long term the company believes there is opportunity for more than 5000 stores by 2025 to 2030. In the first 17 weeks of FY20 Dominos opened 42 new stores across Japan, Australia, Denmark, France, Germany and the Netherlands. Digital innovation, however, is at the core of Domino's business – online sales now account for 67.1% of all sales.
Dominos has worked hard to provide a seamless digital customer experience but is facing increasing competition from online food delivery services. Management has provided a 3–5 year outlook of 3–5% same store sales growth (noting this exceeds industry averages) and 7–9% annual store growth. To continue to grow returns at above average rates, Domino's will need to continue to expand its store network profitably.
Morningstar Quantitative rated Domino's 'overvalued' on 25 December, setting a price target of $45.52 per share. Goldman Sachs, however, rated Domino's a 'buy' in November, setting a 12-month price target of $55.30. Goldman Sachs sees the key risks to Domino's as the Parliamentary review into the Franchise Code, gearing, and competition from aggregators.
Inghams Group Ltd (ASX: ING)
Inghams has been featured in the top 20 most shorted shares on the ASX throughout 2019. More than 12% of shares in the chicken brand are currently short sold. Inghams shares have declined over the course of the year and are down 12% at the time of writing to $3.44 from $3.90 last January.
Inghams was floated by private equity firm TPG back in 2016 at $3.15 a share. Shares in the meat processor reached a high of over $4.60 in 2019 but slumped in August when it reported full year results below expectations. Underlying NPAT declined 4.4% to $103.2 million due to an increase in the effective tax rate. Underlying earnings per share declined 2.1% to 27.8 cents per share. Total dividends of 19.5 cents per share were paid for the financial year, equivalent to 70% of underlying NPAT.
Results were impacted by rising feed costs, which remained at historically high levels. The drought has impacted wheat crops, which has in turn challenged Inghams. Feed is Inghams single largest input cost and costs remain high, which will impact the outlook into 2HFY20. Australian margins will be negatively impacted by higher input costs and channel mix.
Plans to rationalise the processing network did not deliver as expected in FY19. Stronger customer demand impacted operations and resulted in higher costs. This had a significant impact on Inghams' profitability towards the end of FY19 and into FY20. As a result, earnings before interest, tax, depreciation and amortisation (EBITDA) in FY20 will be below underlying EBITDA for FY19, with a return to growth expected in FY21.
JB Hi-Fi Limited (ASX: JBH)
JB Hi Fi has been been one of the top 20 most short sold ASX shares in 2019. More than 11% of JB Hi Fi shares are currently sold short. Despite this, the JB Hi-Fi share price has increased by nearly 90% the past year, from $20.42 in January to $38.24 currently.
Total sales were up 3.5% across the JB Hi Fi group in FY19 to $7,095.3 million. EBIT increased 6.4% to $372.8 million and NPAT increased 7.1% to 249.8 million in FY19. Earnings per share increased 7.1% to 217.4 cents per share and total dividends increased 10 cents per share to 142 cents per share.
In 1QFY20, total sales for JB Hi-Fi Australia were up 4.7% with comparable sales growth of 3.7%. Total sales for JB Hi-Fi New Zealand were up 3.8% with comparable sales growth of 3.8%. The Good Guys reported negative sales growth of 0.5% with comparable sales growth of -1.8%.
Total sales in FY20 are expected to be around $7.25 billion, consisting of $4.84 billion from JB Hi Fi Australia, $0.24 billion from JB Hi-Fi New Zealand and $2.18 billion from The Good Guys.
