The Domino's Pizza Enterprises Ltd. (ASX: DMP) share price has fallen 30% this year after short-seller interest in the company intensified – more than 11% of the company's shares are currently short sold, according to ASIC.
Short selling is where an investor borrows shares to sell, with the aim of buying them back at a lower price, returning the shares to their owner, and pocketing the difference. It is effectively a bet that a company's shares will sharply decline.
Why are short sellers targeting Domino's?
I covered some of the main points in this article yesterday, but in my view the company is being targeted for the following reasons:
- Concerns over franchise profitability (makes franchises less attractive to would-be business owners)
- A weakening of the company's ability to sell new franchises (the ability to do this is key to company growth)
- A belief the company is overpriced, which is doubly concerning if its growth potential is declining (see above points)
There are also regulatory concerns about whether the company is structured in a way that effectively forces franchisees to underpay staff. Although this again ties in more specifically with the franchise-profitability issue, as it is not thought that the company itself is a regulatory minefield.
The more important question for Domino's shareholders is:
What should I do?
Typically I would say that listening to short-sellers should be fairly low on your list of priorities if you are looking to grow your wealth for retirement. If you are a long-term investor, you're looking for a company that can become significantly larger over the next 10 to 20 years, whereas short sellers are trying to profit from a fall in the company's shares over the next ~1-3 years. Most really good investments experience sickening price falls at one time or another.
However, short sellers typically do a lot of work and take significant financial risk betting against companies, and listening to their concerns can be worthwhile if you are a large shareholder and/or considering buying more shares. With the above concerns in mind and its lofty valuation, I'm not a buyer of Domino's today.
