In yesterday’s Daily Reckoning I mentioned how short sellers had increased their bets against the Big Four banks; but, in the scheme of things, the bets were small. Short selling is when you try to profit from a fall in the share price.
Well, betting against the banks might be a tough way to make money, but the short sellers had some success yesterday with Flight Centre [ASX:FLT]. It is number four on the list of most shorted stocks, with 11.4% of its shares sold short.
Yesterday, the company issued a profit warning, saying underlying pre-tax earnings would be down 2–5% on last year. That doesn’t sound like a big deal, but it comes just two weeks after the company said pre-tax profits were likely to rise 4–8% this financial year.
Uncertainty over the election got the blame, although there is clearly more to it. This is the third profit warning in a year for Flight Centre. As you can see in the chart below, over the past two years, the share price has been volatile. It’s now approaching the lows of last August.
[click to open in new window]
The share price fell nearly 9% yesterday. It’s down around 25% since peaking in March this year. The short sellers have done well out of this one lately.
Despite trading on a dividend yield of nearly 5%, the RBA’s recent interest rate cut hasn’t provided any respite. And there’s the lesson for investors. Stocks only get a boost from an interest rate cut if earnings growth remains intact.
Once earnings are under threat, you’ll lose the expected annual dividend in one trading session. So never buy a high yielding stock just for the sake of it.
If you want some guidance on this front, check out my mate Matt Hibbard’s work in Total Income. He’s been building a nice little income-focused portfolio for subscribers for a while now.
As we move closer to the end of the financial year, the frequency of profit warnings is likely to increase. And if the company is exposed to consumer spending, ‘uncertainty’ over the upcoming election is likely to get the blame.
For The Daily Reckoning