Coppo: Buyers are sniffing around Blackmores

Bell Potter


I’d say there may have been some value (if you can call it that) buying or possibly short covering. When I traded & was short  I noticed that once the stock found a short term bottom you had to cover because the dead cat bounce or recovery can be quite sizeable (the fall may resume – but no stock – especially one of this quality goes down in a straight line – which it has so far).

From a trading perspective, Blackmores having fallen from $160.85 just 11 days ago to a low today of $112.53 is a pretty massive $48.32 or –30%. Now the downgrades were about -20% & plus a few PE points derating for losing some growth might be about right. The stock is definitely in the sin bin until they can PROVE that the inventory destocking has been completed & that growth slowed rather than stalled completely. So if I were short, I would be covering now and if the stock has a decent bounce you can always go re-short. For the punters, it looks like a Very short term buy – purely because of the amount of stock that has turned over tells us there has been a complete revamp of the register & the weak holders would have sold out by now. The relentless fall would have tested the nerve of all shareholders – you can even argue we have seen capitulation type volumes (which is good indicator of short term bottoms)

Now since they reported, we have seen 3.1m shares have traded out of 17.2 m quoted. So a massive 18% of the company – but given I’ve established that Hyperion who holds 6.03% have not sold (and I’m now certain they will be buying hard down here) & the founder Marcus Blackmore holds 25.2%. Means that the actual stock than can be traded is really is about 11.83 million shares. Which means that 26% of the company has turned over. So weak holders would have dumped & gone. I guess those still in believe the “big picture” and are not selling down here. Also, I wouldn’t be surprised if we see a substantial buy notice from Hyperion – if they truly believe this is a great long-term growth story, then they just HAVE to be buying. Maybe a buy sub from them may bring some much-needed confidence back into the stock (but at same time instos don’t like to remind investors of their losers – so maybe they have bought just shy of 1% & sitting back until stock rallies back to buy the last bit – it’s an old trick most instos do..  One thing though any bounce will be snuffed out eventually by the shorts. Who I’d say have not finished with them.

What I believe is adding to the massive derating & selloff has been a swarm by Hedge Funds into shorting them. Shorts over the last nine days have increased their short positions by 1.78% of the company or by +35%. They have gone from 5.02% short eight days ago, now up to 6.80%. Given that the shorts hold 9.68% in Bellamys & the shorts in Blackmores did hit 8% (very briefly) in Dec last year. I think it’s safe to assume the shorts are not finished with this one yet & will drive it up to 10% in the coming month.

Now looking at from another perspective & this is scary (for the shorts) and  could one day be good for shareholders if they are forced to cover their shorts – ie.  adjusting for ‘free float” So right now there are about 1.2m shares short (6.80%) BUT adjusting for “real free float” ire excluding Hyperion & Marcus Blackmore ‘s stakes (combined at 30%)– means that the real short in BKL is more like 9.67% already. So in some ways, it will be very dangerous if the shorts really go too much harder on this. Hence some may short cover now & put their shorts back on after the coming rally. The stock has been oversold on a short term basis

After the result I saw CS retain their OUTPERFORM – if they are right then the stock would be great buying here given the bullish comments they have made – CS said “Beyond a weak 1Q17, there are prospects of double-digit EPS growth in FY18 supplemented by China retail growth in FY19 and FY20. Even on lower earnings Blackmores' ROE sits at 50%. China retail is yet to be priced in. We lowered our DCF based target price to A$155/shr (from A$175) Blackmores is trading near Chinese vitamins peers on FY18 EPS—Conba (21.7x), By-Health (19.4x) and BioStime (14.0x, implied Swisse multiple higher). This does not take into account FY19E/FY20E China retail growth.

Written & contributed by Richard Coppleson:  (VIEW LINK)

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Bell Potter Securities is a leading Australian stockbroking, investment and financial advisory firm that provides a comprehensive offering of financial services to a diversified client base that includes individuals, institutions and corporations.

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