Short interest – a reflection of investor expectations that a stock will fall – has jumped to 7.7% of shares outstanding. That’s the highest level since November 2011 (excluding the typical spikes around the time of dividend payments), according to Markit data. Pandora is now the most shorted stock on the OMX Copenhagen 20 CAP index.
But the company also boasts the best return potential in the index, as well as the highest proportion of buy ratings. On average, analysts expect Pandora’s shares to rise more than 30% over the next 12 months. Of the 17 analysts covering the stock, 15 are advising their clients to buy.
Simon Colvin, an analyst at IHS Markit in London, says much of the reason Pandora is being targeted by hedge funds is just part of a “global phenomenon.”
“Retail companies are in general becoming short-interest targets because consumer spending is weak and the industry is facing competition from online sales,” he said. But with Pandora’s share price rising of late, those speculators are under pressure.
“Short sellers are sitting under water and may be trying to cover potential losses by shorting more on the expectation that the share recovery is a short-term rally,” Colvin said.
Shares in Pandora rose as much as 0.4% yesterday, after having traded 1.3% lower earlier in the day. Denmark’s benchmark index was up 0.3% in Copenhagen.
Klaus Kehl, chief analyst at Nykredit Markets, says a number of hedge funds “have been running a case against the US retail market” and that some have probably put together a basket of companies with US retail exposure. That may include Pandora, which gets 25% of revenue from the US, he said.
The three hedge funds with the biggest short positions in Pandora are Coatue Management with 2.1%, AQR Capital Management with 1.4% and Lone Pine Capital with 1.21%, according to filings to the Danish Financial Supervisory Authority. The funds didn’t return e-mails and phone calls seeking comment. A Pandora spokesman also declined to comment.
Pandora shares have gained about 25% since the end of June, but are still down almost 20% since the beginning of the year. That’s the worst performance in Denmark’s benchmark stock index, with no other company lagging so far behind analysts’ price targets. Nordea Bank, Scandinavia’s biggest financial institution, targets a share price of 1,150 kroner. JPMorgan Chase & Co targets 1,200 kroner. The stock closed at just above 750 kroner on Friday.
Pandora is due to publish second-quarter earnings on Aug. 8. Analysts on average expect the company to report a 14% increase in revenue to 4.91bn kroner ($778mn). Its main measure of operating profit is seen rising 6.2% to 1.71bn on kroner.
Kehl at Nykredit says he thinks hedge funds betting against Pandora “are underestimating the growth dynamics of Pandora, which is expanding fast on other markets.” Some hedge funds may also be shorting Pandora on speculation that charms, its key product, are “a temporary fad,” he said.
“I believe the hedge funds are wrong and that may already become clearer at today’s second-quarter earnings,” Kehl said. Citi initiated coverage of Pandora on August 4 with a buy rating, citing market share gains, retail LFL at a potential inflexion point and significant growth opportunities in China and India.
JPMorgan sees 2Q earnings as a “significant positive catalyst” for the shares. The broker estimates that easier comparables versus year-earlier, better sales from new collections and a higher contribution from takeover of franchise holders will help sales grow 15%.
Carnegie’s 2Q dealer survey indicated improved momentum in Italy and Australia, combined with a general impression that April was a low point for the company, and June the best month of the quarter.