Domino’s result saw it off by more than 22% on the open, or 51% down over 12 months, yet the warning signs were clear. Leading into the result, the short position was as high as 12.1%, and Livewire’s contributors have been consistently negative on the stock for months. 5 of the most explicit warnings are below, with a more positive view on the stock from Tim Samway at Hyperion Asset Management.
ANDREW TANG, Morgans
“We highlight our key candidates that may surprise or disappoint during the upcoming August results season. Vulnerable high PE stocks include Ansell (ANS), CSL (CSL), Cochlear (COH), Domino's (DMP)” (VIEW LINK)
JAMES GERRISH, Market Matters
“It’s still hard to argue in favour of [Domino's] on fundamental metrics without a good pair of rose coloured glasses on – and the shorts certainly have been building here". (VIEW LINK)
RICHARD COPPLESON, Bell Potter
"Dominos now has its highest short position ever. The shorts can see blood in the high PE stocks and this one had initially withstood the storm better than other high PE stocks. But it has been savaged hard in the last few months. Problem is that there are & very few instos who dare pay these multiples (especially after the recent general PE contraction) and so the buyer pool is very limited. BUT now with the shorts taking a shine to it, they have extra pressure on them." (VIEW LINK)
SIMON CONN, Investors Mutual
“Companies with forecast strong EPS growth like Dominos Pizza, Corporate Travel and a2 Milk are trading on steep multiples and in our view are pricing in excessively good news. We do not own any of these companies. While they may have attractive growth prospects, they appear over valued to us and we are always very disciplined around valuation.” (VIEW LINK)
GEOFF WILSON, Wilson Asset Management
In an episode of Buy Hold Sell Live, Geoff Wilson said he would be steering clear of Domino’s Pizza (42x p/e), primarily on valuation grounds, as well as Bapcor (24x p/e), and Corporate Travel Management (32x p/e). (VIEW LINK)
TIM SAMWAY, Hyperion Asset Management
Tim Samway, Managing Director, is more sanguine. He says that the first reaction is rarely the right one, and was generally not that unhappy with the result: "There are a few misses and our numbers will come down in the short-term, but it feels like an overreaction". In this wire, he also points out the strong message coming from management on the $300 million share buyback: (VIEW LINK)
FULL COMMENTARY TIMELINE ON DOMINO’S
You can see all Livewire research and commentary on Domino’s here: (VIEW LINK)
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I have a small holding in Domino's via a fund manager in my Netwealth account that was set up to gain access to funds I am deemed too ‘unprofessional’ to directly own. I also have a small short interest in the same stock via a LIC. That’s my declaration of interest out of the way. For the ‘short’ manager it is one of only two shorts held, so the conviction must be very strong. The ‘long’ fund manager has done extremely well over time from Dominos and obviously sees future growth sufficient to justify the PE. High conviction here too, as the weighting of around 12% is about the same as 12 months ago, hence more must have been bought as the price fell. Personally I find the latter a tad too aggressive, irrespective of the subsequent share price movement. The lesson from this and similar price falls (Isentia and a prominent fund manager comes to mind) is that one can’t just hand over your money to any manager and forget about it. One needs to be satisfied that the manager continues to act in line with your own expectations. This may require more than simply reading the brief summary in their monthly report.
I would have thought the first reaction was the right one, in this instance. Plenty of warning signs as commented upon in the article. Does the share buy-back indicate limited growth opportunities in a few years time ? In more recent times, we have been receiving regular Domino's promotions in the 'junk' mail which we previously haven't received - mature market in our area ?