MoneyTalks: Here’s how long-short funds find shorting targets on the ASX
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MoneyTalks is Stockhead’s regular recap of the stocks, sectors and trends that ASX fund managers and analysts are looking at right now and in this edition we’re looking at shorting targets.
Today we hear from Omkar Joshi, principal and portfolio manager at Opal Capital Management.
Joshi only founded the firm in 2019, which has both a long and short fund and targets to make returns regardless of what the market does.
“The essence of market neutral investing is all about returns uncorrelated to the broader market,” he told Stockhead.
“So whether markets are going up, down or moving sideways, that really doesn’t impact our return profile.
“The reason we can do that is we hedge out different factors, different sectors and different styles. So whether it’s growth or value or anything like that – that doesn’t really play into our return profile.
“So we’re making sure we hedge out all those things. If we’re long a growth company, we’ll be a short another growth company, same goes for value and a number of other factors.
“We’re looking to hedge out all those things and really just focus on fundamentals of company. It’s a very much fundamental, bottom up high-conviction strategy and it comes down to picking the right stocks both the long and short side.
“Because it’s market neutral we have a long portfolio and short portfolio; the two portfolios effectively interact and work together to produce an uncorrelated source of returns.”
Joshi says Opal is looking for fundamental changes in a company or its industry, some of which can be happening right before investors’ eyes without the market noticing.
“For us it’s very much about picking stocks with something fundamentally improving there – such as its earnings profile and same with the short side, around something getting worse in the company or industry,” he said.
“We’re looking for turning points, looking for something changing in the company which will impact the value of the business.
“Ultimately for us, there’s a price for everything.
“For example Qantas (ASX:QAN) had been a very good stock on long side in the past. You hear old adages about [how you should] ‘never buy an airline’ and things like that.
“But for us at the right price everything is a great buy, at the wrong price it’s not a good buy, even if it’s a great business.
“It’s important distinction between a good quality company and good quality investment, in our view they’re two different things.”
Joshi shared some more of Opal’s long positions. The first one he named was New Zealand construction company Fletcher Building (ASX:FBU).
“When we entered in mid-2020, had been priced for an overly bearish outlook,” he explained.
“Given the ongoing strength in the business, we believed that there was considerable upside to the company’s earnings guidance and also market expectations, which wasn’t being reflected in the share price.
“The company did end up upgrading its earnings guidance which led to a significant increase in the share price.
Next was Corporate Travel (ASX:CTD) which got slammed amidst the COVID-19 travel sell-off but in the depths of despair made a major acquisition in North America – in local corporate travel agent Transport & Travel.
“The management team successfully navigated through the pandemic and also executed on an acquisition at an opportune time and price despite the ongoing uncertainty caused by the pandemic,” Joshi said.
“A long name we like at the moment is Incitec Pivot (ASX:IPL). We believe there is substantial upside due to the ongoing strength in the business. In particular, fertiliser prices are currently at record levels and likely to stay strong in the near term. This is coupled with a strong demand dynamic as well.
“While the company has had its fair share of problems in the past, the underlying strength in the industry means that there is considerable upside to market estimates.”
As for stand out “performers” on the shorting side, Joshi named A2 Milk (ASX:A2M).
This stock initially held its ground when COVID-19 broke out, before dropping due to earnings downgrades. But Joshi said there were warning bells ringing long before the downgrade.
“There was pantry stocking at start of pandemic and it was starting to cycle – which pulled forward demand,” he said.
“You could see the trends were getting worse, you could track the data, and it was a strong performer on the short side given there were challenges but it was not being reflected in the share price.
“And as it started to come through you saw series of downgrades and it hit the share price.
“The other one was AGL (ASX:AGL), where the market’s earnings expectations were not adequately factoring in the weakness in wholesale electricity prices.
“The share price came under significant pressure as the company disappointed the market on numerous occasions.”
“It’s important to note that when we do go into short position we’re shorting not because we think it’s a fraud or anything like that – we’re quite different from some of the more vocal short sellers,” he continued.
“We believe it’s important to make that distinction – we don’t think anything like that.
“For A2 Milk or AGL, we simply believed that the share price at the time wasn’t reflecting the reality of the outlook for the business.”
When asked about if COVID-19 had been a more complicated or challenging time for investors, Joshi was reluctant to use that description.
“The volatility of the last 18 months have been an interesting environment to invest in. For us, nothing has changed too dramatically because we’re not really focused on where the market is going and whatever is in vogue,” he said.
“Over time you tend to see both value and growth coming in an out of favour…but we have observed there are faster rotations in and out of different styles currently.
“A lot of style and sector rotation has been occurring very rapidly – literally in a month or two. This has meant that the last 18 months feels like we’ve seen lots of different market environments in a short period of time.
“This has meant the market has been testing you even more than normal, and you really have to be quite nimble to successfully navigate these challenges. It’s changing so often that you have to constantly keep changing what you’re doing, ensure the portfolio is correctly hedged and that you’re isolating the appropriate returns.
“It’s changing so often that you have to constantly keep changing what you’re doing, ensure things are hedged out and you’re isolating the appropriate returns.
“That’s been biggest change we’ve seen over the last 18 months. It’s not necessarily a challenge as such but has been more demanding and more interesting.”
The views, information, or opinions expressed in the interviews in this article are solely those of the interviewee and do not represent the views of Stockhead.
Stockhead does not provide, endorse or otherwise assume responsibility for any financial product advice contained in this article.