I believe that Northern Rock are heavily exposed to the UK housing market. Their share price has had a good run lately, and is now sitting at all-time highs.
With the ever decreasing monthly mortgages, and soon re-mortgages, does anyone have any views on why they would not be a good target for shorting?
BTW: Opened a short positions on Countrywide and Paragon today!
Full Version: Shorting Northern Rock
Blimey, everyone and his wife is opening shorts on CWD!
Not hard to see why. 3 profits warnings, big director selling, and yet they continue to defy gravity, near their all-time high.
Current price: 324p.
see graph
Posting from TMF:
Not hard to see why. 3 profits warnings, big director selling, and yet they continue to defy gravity, near their all-time high.
Current price: 324p.
see graph
Posting from TMF:
QUOTE
Hi,
Don't often short things, and when I do they usually go wrong, but this idea cropped up today & looks a terrific short I think if you're nervous about the UK housing market.
Repobear's excellent write-up on Countrywide is here ...
http://boards.fool.co.uk/Message.asp?mid=8932489
Here are the numbers;
280p * 170.2m shares in issue (per Hemscott) = mkt cap £ 476.6m
Can't find a net debt statement in the interims http://www.uk-wire.com/cgi-bin/articles/20...70000P15EE.html but there seemed to be £9.1m cash and term loans of £60.6m, so that implies net debt of £51.5m, which if correct would make the Enterprise Value £528.1m (310p a share)
Countrywide is a chain of estate agents, with turnover around £500m, so looks pretty fully valued on a Price to Sales Ratio just above 1, given that at this stage of the cycle one would expect an estate agent to be valued low, to allow for a slowdown in the property market. Well not so here.
The balance sheet is poor, with negative net assets of £15.5m, stripping out goodwill worsens this to £31.8 negative net tangible assets. So in a sharp slowdown in the housing market this could be a candidate to go bust fairly early on IMO.
The valuation hinges on strong profits growth at the interim stage, where it made £38.4m operating profit on continuing ops. The last full year to 31/12/2003 showed profits of £80.4m on the same basis. It looks as if there is a seasonal bias towards the second half - does this make sense to property experts ?
The first profits warning seems to have been issued on 23/9/2004, with a more severe warning issued today ...
http://www.uk-wire.com/cgi-bin/articles/20...21442P9B3D.html
... which concludes,
As a consequence of these market conditions the group is likely to make a
material loss in the fourth quarter of 2004 and our latest forecasts suggest
that profit before tax for 2004 will be significantly below current consensus
forecasts.
Before this warning the brokers consensus was for 28.45p EPS in 2004. What does "significantly below" mean ?? I'll guess that it may be say 20% below, that drops out at 22.8p, for a debt-adjusted PER of 13.6 which looks rather expensive for a business in decline.
The crux is whether you think the UK property market is now broken (which is my view), or whether we're just seeing a blip in confidence before buyers return next year.
It's not so much the prices that matter, but as an estate agent they obviously need volume of transactions, so even if prices hold up OK, which they may well do in some cheaper parts of the UK, as long as volumes remain subdued then 2005 earnings are likely to come in lower still.
We all know that estate agents suffer badly in a housing downturn, as their costs are largely fixed, but their revenues can dry up in a major way in a housing downturn.
These shares look like an accident waiting to happen, IMO, hence the shorting opportunity.
Plus it's very liquid, so easy to short & close in the event of it going wrong.
It looked to me as if someone with deep pockets was propping up the shares today, so it may not drop as easily as I am hoping. Certainly a 6% fall today on a dreadful profits warning, was a surprisingly muted market reaction.
Any other views, or have I missed anything / got anything wrong in the above ?
(I hold a short position in Countrywide)
Regards,
Paul.
Don't often short things, and when I do they usually go wrong, but this idea cropped up today & looks a terrific short I think if you're nervous about the UK housing market.
Repobear's excellent write-up on Countrywide is here ...
http://boards.fool.co.uk/Message.asp?mid=8932489
Here are the numbers;
280p * 170.2m shares in issue (per Hemscott) = mkt cap £ 476.6m
Can't find a net debt statement in the interims http://www.uk-wire.com/cgi-bin/articles/20...70000P15EE.html but there seemed to be £9.1m cash and term loans of £60.6m, so that implies net debt of £51.5m, which if correct would make the Enterprise Value £528.1m (310p a share)
Countrywide is a chain of estate agents, with turnover around £500m, so looks pretty fully valued on a Price to Sales Ratio just above 1, given that at this stage of the cycle one would expect an estate agent to be valued low, to allow for a slowdown in the property market. Well not so here.
The balance sheet is poor, with negative net assets of £15.5m, stripping out goodwill worsens this to £31.8 negative net tangible assets. So in a sharp slowdown in the housing market this could be a candidate to go bust fairly early on IMO.
The valuation hinges on strong profits growth at the interim stage, where it made £38.4m operating profit on continuing ops. The last full year to 31/12/2003 showed profits of £80.4m on the same basis. It looks as if there is a seasonal bias towards the second half - does this make sense to property experts ?
The first profits warning seems to have been issued on 23/9/2004, with a more severe warning issued today ...
http://www.uk-wire.com/cgi-bin/articles/20...21442P9B3D.html
... which concludes,
As a consequence of these market conditions the group is likely to make a
material loss in the fourth quarter of 2004 and our latest forecasts suggest
that profit before tax for 2004 will be significantly below current consensus
forecasts.
Before this warning the brokers consensus was for 28.45p EPS in 2004. What does "significantly below" mean ?? I'll guess that it may be say 20% below, that drops out at 22.8p, for a debt-adjusted PER of 13.6 which looks rather expensive for a business in decline.
The crux is whether you think the UK property market is now broken (which is my view), or whether we're just seeing a blip in confidence before buyers return next year.
It's not so much the prices that matter, but as an estate agent they obviously need volume of transactions, so even if prices hold up OK, which they may well do in some cheaper parts of the UK, as long as volumes remain subdued then 2005 earnings are likely to come in lower still.
We all know that estate agents suffer badly in a housing downturn, as their costs are largely fixed, but their revenues can dry up in a major way in a housing downturn.
These shares look like an accident waiting to happen, IMO, hence the shorting opportunity.
Plus it's very liquid, so easy to short & close in the event of it going wrong.
It looked to me as if someone with deep pockets was propping up the shares today, so it may not drop as easily as I am hoping. Certainly a 6% fall today on a dreadful profits warning, was a surprisingly muted market reaction.
Any other views, or have I missed anything / got anything wrong in the above ?
(I hold a short position in Countrywide)
Regards,
Paul.
QUOTE(Van @ Jan 6 2005, 10:15 PM)
Blimey, everyone and his wife is opening shorts on CWD!
Not hard to see why. 3 profits warnings, big director selling, and yet they continue to defy gravity, near their all-time high.
Current price: 324p.
see graph
Posting from TMF:
Not hard to see why. 3 profits warnings, big director selling, and yet they continue to defy gravity, near their all-time high.
Current price: 324p.
see graph
Posting from TMF:
Van: What about Northern Rock and Paragon - any views? Thx
I'm not a TA by any means, but both do indeed look incredibly toppy.
Unlike CWD, a slowdown in turnover isn't going to kill these guys so long as they have a customer base keeping the money rolling in.
NRK - rather than bouncing off the 793 high, they seem to have held remarkably well and look like retesting this level. PAG could bounce down very quickly or could hover and breakout still further. Funds are still buying these shares, which many see as a bullish sign. Some fund manager might look at the fundamental and say "NRK - p/e of 10? Yes please." There's no accounted for stupidity sometimes, especially where the stockmarket is concerned!
Can't believe that both shares won't dip lower than this at some point, though. What date does your short close?
Bovis and Barrett are due interims very soon. This could swing sentiment a lot either way.
PAG
NRK
Unlike CWD, a slowdown in turnover isn't going to kill these guys so long as they have a customer base keeping the money rolling in.
NRK - rather than bouncing off the 793 high, they seem to have held remarkably well and look like retesting this level. PAG could bounce down very quickly or could hover and breakout still further. Funds are still buying these shares, which many see as a bullish sign. Some fund manager might look at the fundamental and say "NRK - p/e of 10? Yes please." There's no accounted for stupidity sometimes, especially where the stockmarket is concerned!
Can't believe that both shares won't dip lower than this at some point, though. What date does your short close?
Bovis and Barrett are due interims very soon. This could swing sentiment a lot either way.
PAG
NRK
Van
I'm not a fool member but i think i might be soon. Anything intelligent been said recently about DXNS or CPR that you could post here?
I'm not a fool member but i think i might be soon. Anything intelligent been said recently about DXNS or CPR that you could post here?
I've gone for a June close for CWD, and am thinking of doing the same for PAG and NRK.
I reckon NRK has been propped up by takeover speculation. They are heavily reliant on new mortgage lending and re-mortgaging - with a 'slowing' housing market, lower valuations, and hopefully higher IRs their revenues should take a hammering.
Also, I've heard, third-hand ofcourse, that there has been some seriously dodgy self-certs through NRK.
I reckon their share price could be up for a 20-30% correction over next few months.
On a similar note, I can't see what on earth is propping up PAG share price!!
I reckon NRK has been propped up by takeover speculation. They are heavily reliant on new mortgage lending and re-mortgaging - with a 'slowing' housing market, lower valuations, and hopefully higher IRs their revenues should take a hammering.
Also, I've heard, third-hand ofcourse, that there has been some seriously dodgy self-certs through NRK.
I reckon their share price could be up for a 20-30% correction over next few months.
On a similar note, I can't see what on earth is propping up PAG share price!!
Strat, I tend to hang on ADVFN's boards much more than fool. Lots of really good and knowledgeable people on there, if you can look past the ramping/deramping. Would highly recommend you join the free BB (even if it means a couple of spammails a day) if you want informed opinioned on any popular shares.
One very simple TA tool is to look at different moving avg lines as support/resistance levels; you can see that DXNS just bounced off the 50 day MA and is looking distinctly shaky imo given the gloomy retail figures. CPR? Just looks like a slow-burner to me
Big Ears, cool, me too. Don't like the way it ticked up today when the Yanks came out to play. Maybe it's them who are supporting the price.
One very simple TA tool is to look at different moving avg lines as support/resistance levels; you can see that DXNS just bounced off the 50 day MA and is looking distinctly shaky imo given the gloomy retail figures. CPR? Just looks like a slow-burner to me
Big Ears, cool, me too. Don't like the way it ticked up today when the Yanks came out to play. Maybe it's them who are supporting the price.
One thing to consider is market cap to sales ratio - or profit margin.
CWD are likely to make profits of (roughly) £30m-£40m, on turnover of £500m. That is a 6-8% profit margin. All it takes is for turnover (ie transactions!) to fall 8%, and unless they cut costs they will fall into loss.
Compare this with PAG's and NRK's profit margins, which are much healthier (nearly 50% in the case of PAG), and you can see that they have plenty of leeway to weather a slight downturn.
This is why high sales-to-market-cap stocks are considered risky stocks. In an economic upturn it takes only a small upturn in sales to increase profits many times over and send the shareprice soaring, while in a downturn it only takes a small dip in sales to wipe out the wafer thin profits and send shareprice plummeting.
CWD are likely to make profits of (roughly) £30m-£40m, on turnover of £500m. That is a 6-8% profit margin. All it takes is for turnover (ie transactions!) to fall 8%, and unless they cut costs they will fall into loss.
Compare this with PAG's and NRK's profit margins, which are much healthier (nearly 50% in the case of PAG), and you can see that they have plenty of leeway to weather a slight downturn.
This is why high sales-to-market-cap stocks are considered risky stocks. In an economic upturn it takes only a small upturn in sales to increase profits many times over and send the shareprice soaring, while in a downturn it only takes a small dip in sales to wipe out the wafer thin profits and send shareprice plummeting.
Am now shorting CWD, PAG, and NRK.
Got a bit lucky with PAG on the very first day - hope it continues next week.
Hope I have caught NRK at (near) their top - guessing (hoping!) that the fund manager buying will have dried up, and we should beging to see a small slide.
Got a bit lucky with PAG on the very first day - hope it continues next week.
Hope I have caught NRK at (near) their top - guessing (hoping!) that the fund manager buying will have dried up, and we should beging to see a small slide.
Good luck Big Ears, I had a samll short on NRK a while back on which I lost a few quid. it seems to be a popular share, so I'd watch it carefully, you may make money, though I think there are safer shorts around.
Anyone know when CWD results are out for 2004? - I can't find anything on there website.
CWD results due out Feb, not sure of exact date
QUOTE(Yonmon @ Jan 8 2005, 06:05 PM)
Good luck Big Ears, I had a samll short on NRK a while back on which I lost a few quid. it seems to be a popular share, so I'd watch it carefully, you may make money, though I think there are safer shorts around.
Well, I think it must be a case of begiiners luck - my first ever 'short' and I am up a 'few quid' on my NRK short- am expecting more next week as a result of reports on mortgage lending from CML etc.
I have to say that this 'shorting' lark is great....(guess I may change my view when/if I get burnt!)
Update.. doesn't look so good for the shorts with CWD, PAG & NRK all showing healthy rises in January, carried on the back of a strong FTSE. They have begun falling just in the last week, however.
Trouble is they have been attracting the momentum trader as they broke out to new highs. CWD jumped to 360p on the day of Land Registry results! Full CWD results due next month.
CWD, NRK, PAG
Trouble is they have been attracting the momentum trader as they broke out to new highs. CWD jumped to 360p on the day of Land Registry results! Full CWD results due next month.
CWD, NRK, PAG
I have been down the path you are travelling. You win some you lose some but your tactics are destructive.
Alternate tactics suggested here.
Alternate tactics suggested here.
Yes.. good advice all in all. I've been reading a couple of books on Jesse Livermore.
His system was to trade tandem stocks, be prepared for the next major change in trend, but always wait for the market to confirm the direction, and never to trade against the market. If the market was going up, he would go long, if the market was falling, he would go short. Now is not the time to short, despite the dire fundamentals of the market. There's far more money to be made safely in taken long positions.
His system was to trade tandem stocks, be prepared for the next major change in trend, but always wait for the market to confirm the direction, and never to trade against the market. If the market was going up, he would go long, if the market was falling, he would go short. Now is not the time to short, despite the dire fundamentals of the market. There's far more money to be made safely in taken long positions.
In "How to trade in stocks" Jesse Livermore said that the market had changed from "the days when markets were broad and liquid". So he realised that the days of the "speculator of the old type" were history. There is a lot of common ground between Livermore's 1940 book and Weinstein's.
I think that Livermore's system at the back of his book refers to what worked early on in his life. Nobody seems to have applied it to modern markets. Maybe thats why Livermore published it, because it didnt work anymore.
I think that Livermore's system at the back of his book refers to what worked early on in his life. Nobody seems to have applied it to modern markets. Maybe thats why Livermore published it, because it didnt work anymore.
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