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Why short interest continues to rise in Tassal Group Limited

It’s been a disappointing 2018 thus far for salmon producer Tassal Group Limited (ASX: TGR) with the price of its shares falling around 5%. The stock is now down around 20% over the last 12 months with yesterday’s carnage on global equity markets resulting in a new 52 week low of $3.44 before bouncing to currently trade at $3.57.

Broker downgrade

In early December, broker Ord Minnett slashed its price target for Tassal from $5.00 to $3.43 due to the significant drop in international salmon prices that have occurred since May 2017. The downgrade led to a steep decline in Tassal’s share price from $3.94 hitting a then 52 week low of $3.45. A bounce over Christmas and January saw the stock recoup most of those losses but the company has once again come under intensified selling pressure over the last week.

Short interest rises

The trading sessions on January 31 and February 1 saw an unusually high amount of volume fueled by a sharp rise in gross shorts despite no announcements being released to the market. On January 31, 2.39 million gross shorts were reported on 4.55 million shares traded and on February 1, 1.31 million shares were short sold against volume of 2.88 million shares.

Short interest has now risen from around 3% in early December to 7.77% as at 31 January 2018, the highest level over the last 12 months. The shorts appear to be using the decline in international salmon prices to position themselves for a disappointing half yearly earnings report and future guidance. International salmon prices are becoming increasingly important for Tassal given their growing contribution to the company’s top line. Salmon comprises approximately 84% of Tassal’s operating revenues which grew in FY17 by 4.6% to $445 million with export revenues soaring by 238% to $44 million. The substantial growth in export revenues managed to offset the decline in domestic revenues which dropped by 2.8% to $401 million.

Despite being the larger of the major salmon producers, Tassal continues to underperform major rival Huon Aquaculture Group Ltd (ASX: HUO). Tassal will report its half yearly results on February 23. At current prices, the market is expecting a disappointing earnings result with the stock trading at less than 10 times trailing earnings. The large amount of shorts represent stored buying power and leaves the possibility of a short squeeze if Tassal can deliver a result above market expectations given the amount of bearishness currently priced in the stock.

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