13
Aug
2019

Share

What did JB Hi-Fi, REA Group and James Hardie have in common coming into reporting season?

Reporting season is now underway and there have already been a few notable share price moves – JB Hi-Fi (ASX:JBH), REA Group (ASX:REA) and James Hardie (ASX:JHX) leading the way for some larger companies.

Each stock had something in common, which was a relatively large short interest active in the names. As I have written previously, a large active short interest provides a potential opportunity for investors to profit from a potential “squeeze” as it provides a trigger for short covering.

Screen Shot 2019-08-13 at 12.58.39 pm

* Days to cover refers to estimated number of trading days it would take to cover a stock’s short interest based on average daily trading volumes

In the case of REA and JHX, both these companies continued their rally in the second day, with REA up a further 6.3 per cent and JHX 2.2 per cent. JBH was also up on the second day, although only 0.8 per cent.

JB Hi-Fi – Net profit of $249.8million FY19 was 2.7 per cent better than consensus estimates of $243 million, while revenue of $7,095 million was slightly ahead of consensus estimates at $7,089 million. The better than expected profitability was largely driven by an improvement in gross margins in The Good Guys, where the previous half was impacted by strong price competition.

REA Group – Net profit of $295.5 million for FY19 was 5.5 per cent below consensus estimates of $313 million, with the miss largely attributable to lower revenues as the weak housing market took a toll on REA’s listing volumes. Despite the miss, the company provided a positive outlook for listings in 2H 2020, as well as company initiatives including monetising agent leads, ability to manage costs, monetising data services including Hometrack and recovery in Smartline post Royal Commission.

James Hardie – reported better than expected volume growth of 5 per cent in softer market conditions (management estimated a flat market) – the growth was around 2 per cent better than analyst expectations. EBIT margins were also better at 25 per cent as the company benefited from initiatives from their Lean cost savings programs.

In each case, the company reported profitability numbers that were commendable in tough market conditions (weak environment for consumer spending for JBH, lower listing volumes for REA, slowing US housing market for JHX).

However, with relatively small percentage differences in the actual vs expected outcomes, it’s unlikely the assessment of a business “value” alters that materially following a half-year or quarterly result (the incremental new information in a full-year result being 6 months of financials). What does change rapidly is the share price. In these situations where the outlook appears to have improved versus prior expectations, shorters will seek to cover positions as the expected catalyst of a soft earnings result triggering a share price fall fails to materialise.

If you would like to read more on short selling and which stocks have a high short interest going in to the results, you can read my article: How to profit from short selling

The Montgomery Global Funds and Montaka own shares in REA Group. This article was prepared 13 August with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade REA Group you should seek financial advice.

Our Funds

The Montgomery Fund

  • AUSTRALIA/NZ
  • Concentrated high conviction equities
  • From $25,000
Learn More

Montgomery Global Fund

  • GLOBAL
  • Concentrated high conviction equities
  • From $25,000
Learn More

Montgomery Alpha Plus Fund

  • GLOBAL
  • A market neutral strategy
  • From $50,000
Learn More

Montaka Global Access Fund

  • GLOBAL
  • Access long/short global equity portfolio
  • From $50,000
Learn More

Montgomery Global Equities Fund (ASX:MOGL)

  • GLOBAL
  • Concentrated high conviction equities
  • No minimum investment - see your broker limits
Learn More
Close

Our Funds

Concentrated High Conviction Equities

Listed

Montgomery Global Equities Fund (ASX:MOGL)

Global
Available on the ASX as an Exchange Traded Managed Fund, invests in 15 to 30 quality global businesses for long-term capital growth with a target distribution yield of 4.5% per annum. Mirrors the strategy of the Montgomery Global Fund.
Unlisted From $25,000

Montgomery Global Fund

Global
Invests in 15 to 30 quality global businesses for long-term capital growth. Priced daily. Mirrors the strategy of the Montgomery Global Equities Fund (ASX:MOGL).
Unlisted from $25,000

The Montgomery Fund

Australia/NZ
Aims to provide long-term growth and income by investing in 20 to 40 high-quality Australian and New Zealand businesses trading at attractive valuations. Priced daily.
New Fund

Montgomery Small Companies Fund

Australia/NZ
Aims to provide long-term growth by investing in 30 to 50 high quality, undervalued, Australian and NZ small and emerging companies with strong growth potential. Priced daily.
Unlisted from $1 Million

The Montgomery [Private] Fund

Australia/NZ
Seeks to deliver absolute returns from a portfolio of high-quality Australian and New Zealand businesses. Capital preservation is paramount. By invitation only.

Alternate Equity Strategies

Unlisted from $50,000

Montgomery Alpha Plus Fund

Global
Aims to generate positive returns in both rising and falling markets. Invests in 80 to 180 global businesses expected to deliver above-average returns, while selling short a similar-sized portfolio expected to deliver below-average returns. Priced daily.
Unlisted from $50,000

Montaka Global Access Fund

Global
Aims to generate materially higher risk-adjusted returns, net of fees, than is generally available in the equities market over the medium term. Priced monthly. Provides retail investors access to the Montaka Global Fund.
Unlisted From $1 Million

Montaka Global Fund

Global
Aims to generate materially higher risk-adjusted returns, net of fees, than is generally available in the equities market over the medium term. By invitation only.