Rise in short-selling flattens bread maker's shares

Shares in struggling bread maker Goodman Fielder take another step down.

By InvestSMART · 17 Jan 2012

By InvestSMART ·
17 Jan 2012

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Shares in struggling bread maker Goodman Fielder take another step down.

SHARES in struggling bread maker Goodman Fielder have taken another step down this year, with an increase in short-selling activity by hedge fund investors indicating uncertainty about the company's turnaround strategy.

Goodman Fielder, which faces increasing price pressures and competition from home-brand products as a result of the supermarket wars, has had its shares hit fresh lows over the past 10 days, falling below 40?.

The shares closed down half a cent at 42? yesterday, down on the 45? a share at which the company raised more than $259 million in September-October, and about 74 per cent below its post-financial crisis peak of $1.62, reached in October 2009.

Meanwhile, the company has rejoined the list of the top 20 most-shorted stocks on the ASX, according to Commonwealth Bank analysts using net short position data from the Australian Securities and Investments Commission.

As of last Monday, about 4.1 per cent of Goodman Fielder shares had been sold short, down from a peak of 5.5 per cent during last

year's capital raising but a sharp increase from later last year.

Equities analyst Nizar Torlakovic said the bank expected Goodman Fielder to deliver ''a weak profit result in February, given tough conditions, and an increase in short-selling activity was not unexpected''.

''So far short positions above this [4.1 per cent] level were short-lived,'' Mr Torlakovic said.

''However, that may change if the result proves to be worse than expected.''

Last year was difficult for Goodman Fielder, which endured a profit downgrade, a switch to new chief executive Chris Delaney, $300 million in write-downs, and the dilutive capital raising.

The company also announced a $100 million cost-cutting and supply chain optimisation exercise and the sale of non-core businesses. Goodman Fielder declined to comment yesterday.

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Frequently Asked Questions about this Article…

Why are Goodman Fielder shares falling and what’s driving the share price decline?

Goodman Fielder shares have fallen as the company faces increasing price pressures and stronger competition from supermarket home-brand products. The share price hit fresh lows recently, closing at about 42¢ after previously trading at 45¢ when the company raised more than $259 million. Short-selling activity by hedge funds and investor uncertainty about the company’s turnaround strategy have also put downward pressure on the stock.

What does the recent rise in short selling of Goodman Fielder shares mean for investors?

A rise in short selling generally signals market skepticism about a company’s near-term prospects. Goodman Fielder has rejoined the list of the top 20 most-shorted ASX stocks, according to Commonwealth Bank analysts using ASIC net short position data. That increase in short positions reflects doubts about the company’s turnaround and can add extra downward pressure on the share price if expectations worsen.

How much of Goodman Fielder’s stock is currently sold short and how has that changed?

As of last Monday about 4.1% of Goodman Fielder shares had been sold short. That is down from a peak of roughly 5.5% during last year’s capital raising but represents a sharp increase from levels seen later last year.

What recent corporate actions has Goodman Fielder taken to try to improve its performance?

Over the past year Goodman Fielder has undergone a difficult period that included a profit downgrade, a change of CEO to Chris Delaney, around $300 million in write-downs, and a dilutive capital raising. The company also announced a $100 million cost-cutting and supply-chain optimisation program and plans to sell non-core businesses.

What does it mean that Goodman Fielder rejoined the top 20 most-shorted stocks on the ASX?

Rejoining the top 20 most-shorted ASX stocks means a relatively large share of Goodman Fielder’s float is being bet against by short sellers. According to Commonwealth Bank analysts using ASIC data, that status signals increased investor skepticism and can amplify downward momentum if negative news—such as a weak profit result—materialises.

Could upcoming profit results affect short-selling and the stock price of Goodman Fielder?

Yes. Commonwealth Bank equities analyst Nizar Torlakovic expected Goodman Fielder to report a weak profit result in February given tough conditions. He noted that short positions above the current ~4.1% level have so far been short-lived, but that could change if the company’s result proves worse than expected—potentially prompting more persistent shorting and further share price pressure.

How have last year’s events (write-downs, capital raising, leadership change) impacted investor sentiment in Goodman Fielder?

Last year’s profit downgrade, about $300 million in write-downs, a dilutive capital raising and a switch to new CEO Chris Delaney have contributed to a difficult backdrop for Goodman Fielder. Those events eroded confidence in the turnaround and coincided with increased short-selling and a notable fall from the company’s post-financial-crisis peak share price of $1.62.

What should everyday investors watch for next when monitoring Goodman Fielder stock?

Investors should keep an eye on the company’s upcoming profit result (expected in February in the article), any updates on the $100 million cost-cutting and supply-chain optimisation program, progress on selling non-core businesses, and changes in short-selling levels reported by ASIC. The company’s public commentary—or continued refusal to comment—may also influence sentiment and the share price.