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Last week, I told you why I quite like short-selling stocks. I explained that I don’t care that it’s unpopular - it is exciting; and there are a few reliable ways to find a great short.
But it works both ways.
For the last year, one of my favourite stocks has fallen foul of short sellers - highflier SuperGroup (SGP) has fallen from a peak of around £18 to less than its IPO price of £5.
But after some news this morning I think SuperGroup is primed for a turnaround. I think the short sellers on this stock could get burnt over the next year.
Christmas trading figures just released today look pretty good. The stock is up 3% at £5.70 as I write. And that could be just the start of it.
The shorters have had their fun
I first wrote about SGP back in March 2010. I said that it was one of the very few IPOs I would put my money on. And wow - the stock soared from £5 to around £18 – in fact it was Europe’s best performing IPO.
But boy, have things taken a turn for the worse since then. The stock was lambasted for lower than expected profits in May last year, and then again in October when a botched warehouse systems upgrade messed up stock distribution.
Detractors have really had something to get their teeth into. And that’s the thing – a little bit of bad news is enough to cause panic and drive a stock into the ground.
The fact that the good news far outweighs the bad is neither here nor there as far as the share price is concerned.
But I don’t think we need to worry too much. In fact, I think it gives us an opportunity to top up. And for anyone that followed my advice and sold out a third of their holding at £14 last year, then now could be a very good time to buy your stock back.
This is a great growth story
SGP is growing at breakneck speed. And yes, you might say that’s foolhardy. We’ve already seen how it’s led to stock issues – which incidentally put a near-£9m dent into its profits. Another key concern is that success will drive the brand into early extinction.
And let me just state right from the off, I share these concerns. I’m by no means a fashion guru. You won’t find me perusing the shelves of SGPs flagship store in Regent Street (the first floor of which is now open). But what I can do is look at the figures.
And the figures are telling me that these concerns are overdone.
Figures released this morning show retail sales up 28% in the run-up to Christmas. But with a business growing so quickly, these figures can be misleading. After all, it's adding stores at a rate of around two a week – so of course sales are going to be up.
I prefer to look at what the retail industry calls ‘like for like’ sales growth. This figure looks at what sales would have been if we ignored new openings. Like for likes were up 9.3% in December.
That’s a fantastic figure. Other retailers can only look on in envy.
But what’s really exciting here is the international aspect to the business. Until recently, SGP has been a UK-centric company. Now, more and more business is coming in from abroad. The interim accounts (to the end of Oct 2011) show 65% of sales are generated abroad. That’s great news for two reasons: first, it makes the business less reliant on a squidgy UK economy; and secondly, it brings the brand to a new market where it’s yet to make an impact.
Recently the group signed a lease for a new store in New York’s Time Square. That’s due to open in May. Just think about that. If US sales follow the way of the UK, it’s going to put a rocket under the sales figures. Of course that’s a very big if. But short-sellers must be very, very worried about the prospect. If customers take a liking to the brand over there, then US investors may well get a taste for the stock over here.
And anyway, for a short seller to reap their maximum reward, they want the business to go belly up. The way that usually happens is down to debt. Most of the retailers that went belly up over recent weeks were the ones that were financially engineered by private equity holders over recent years.
SGP was doggedly pursued by the financial engineers (private equity) during its early days. But it refused to team up with them. The result? Business expansion is financed through its own cash generation. There’s £8m on the balance sheet and net current assets (NCA) of £65.6m.
The shorts will have trouble trying to push this one into the ground. Sure, you can drive a business with a limp balance sheet into oblivion: drive the share price down, cause panic, and watch suppliers and customers desert.
But don’t think that the same dynamic works in SGP's case.
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Should you buy in?
Sure, there are risks with SGP - there are with any stock. It’s in a dreadful sector of the economy; it has had and will probably have operational problems associated with its break-neck speed of growth; and the biggest risk of all, the brand may prove to be a flash in the pan.
I don’t know what the future holds. All I can do is make an assessment of the group’s strategy and monitor the figures as and when they’re released.
And based on today’s figures it’s business as usual for SGP. Fantastic growth and a great story.
This is certainly a volatile stock. That’s something you need to consider in assessing whether investing in SuperGroup is right for you. But I’m not too bothered about that – especially when short sellers drive the price down to undervalued levels.
If back in March 2010, somebody had told me that SGP would achieve what they have, I’d have told them they were barking mad. No way could you build an international business so quickly! But they have – and now the shares are practically back at the IPO price!
I still say anything below a tenner is cheap – and given that the stock is around £5.40 today, it looks like a bargain. Analysts are even pencilling in a small dividend for next year which is almost unheard of for a growth stock like this.
But please bear in mind I’m not saying this makes SGP a racing certainty. What I’m saying is that if SGP can continue to build an international brand that can maintain its staying power, then this stock has the potential to fly. On a risk and reward basis the stock looks very compelling.
Ticker: SGP:LN
Price: £5.37
52 Week High/Low: £18.20/£4.35
Market Cap: £430.86m
Performance since listed: March 2010 +159.70% | 2011 -56.71% | 2012 13.4%
• This article is taken from the free investment email The Right side. Sign up to The Right Side here.
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