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Short watch: where next for a2 Milk, Afterpay and Blackmores shares?

To round out the week, we take a look at the current short interest on Afterpay, a2 Milk and Blackmores, released by ASIC yesterday.

With the ASX 200 closing in on its highest level since August – reaching the 6735 point mark as of 15:52 AEST – we take a look at the short interest on some of Australia’s most popular stocks, as reported by ASIC yesterday.

The a2 Milk share price declines

Though A2M (ASX: A2M) has delivered spectacular growth for investors in recent years, its share price has come under pressure after delivering FY19 earnings that lagged analyst expectations.

A high valuation relative to the ASX 200 and the expectation that margins will come under pressure in FY20 have also potentially contributed to increased short interest on the infant formula stock of late.

As it stands, a sizable 51 million of the 735 million shares on issue are currently held short, equating to roughly 7.01% of A2M's issued stock.

Even with this considered, UBS recently reiterated their buy rating and a 12-month price target of NZ$17.10 on A2M. By comparison, Citibank remains mixed on a2 Milk's prospects following its recent strategy day presentation, hitting the stock with a neutral rating and a price target of A$15.15.

Afterpay share price gains momentum as shorters flee

ASIC’s latest short report also revealed that short interest in Afterpay (ASX: APT) has all but disappeared, with only 4.2 million of Afterpay’s 252 million shares being held short.

This proves an interesting point when taking a broader perspective: back in May 2018 for example, a substantial 9.53% of Afterpay’s shares were held short, with investors seemingly believing that either the company’s valuation was too high or that its growth could not be sustained.

History so far shows us that these short sellers were proven severely wrong. Afterpay currently boasts underlying sales figures of A$5.2 billion, more than 5 million users and has seen its share price rise over 400% since May 2018.

Yet even as the company commands a frothy FY20 estimated price-to-earnings ratio of 850 and a current price-to-sales ratio of 35.41, according to Bloomberg Data, investors seem wary of shorting Afterpay again.

To quote the famed short-seller and hedge fund legend David Einhorn:

‘It is dangerous to short stocks that have disconnected from traditional valuation methods. After all, twice a silly price is not twice as silly; it's still just silly.’

In line with these views, brokers continue to remain relatively bullish on Afterpay’s prospects.

Ord Minnet has a buy rating and a price target of A$35.10 on Afterpay; whereas Morgans has a slightly lower target price target of A$31.75 and an add rating on the stock.

Blackmores share price rebounds from August low

Finally, Blackmores (ASX: BKL) short interest of 9.67% is hardly surprising when you consider the still problematic US-China trade tensions, in addition to the company’s own lacklustre FY19 results.

Indeed, as we covered previously, the company posted sluggish revenue growth, a steep decline in earnings (NPAT) and noted that it expected its bottom-line to continue to come under pressure in the first-half of FY20.

Mind you, while the Blackmores share price fell around 14% following the FY19 announcement, the company has seen its stock rebound from August lows, rising around 30% since then.

Of the 17,362,206 shares on issue 1,678,475 are held short, according to the latest ASIC report.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

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