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The popular short-selling target for a falling property market

Those looking to avoid exposure to the falling property market or for a new short-selling target may want to keep an eye on online auto classifieds business Carsales.Com Ltd (ASX: CAR).

Its share price has come under pressure in the last one or two months, but I think there could be more room for the stock to de-rate when it hands in its full-year profit results on August 22.

The latest vehicle sales data has shown signs of weakness in the market and it isn’t by coincidence that auto sales are falling amid a property slowdown.

This is due to what economists call the “wealth effect”. When home prices are rising, consumers feel richer and more confident even though they may have no extra money in their wallets.

The waning wealth effect has prompted some hedge funds to up their short-selling bets against retailers like JB Hi-Fi Limited (ASX: JBH) and Harvey Norman Holdings Limited (ASX: HVN). Short-selling is when a trader borrows stock to sell on-market in the hope of buying it back at a lower price later to profit from the difference.

But shorting retailers has become a crowded trade. Both JB Hi-Fi and Harvey Norman are among the most shorted stocks on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index with 19% and 11% of their shares loaned out to these bearish traders, respectively.

In contrast, only 2% of Carsales.Com’s shares are out on loan. What’s more, the proportion of its shares that are in the hands of short-sellers has been dropping since mid-June.

The share price crash of on-line jobs website SEEK Limited (ASX: SEK) serves as a reminder to what may happen if Carsales.Com disappoints on its profit or outlook.

But it isn’t only falling property prices that could put a strain on our largest on-line auto website. It’s customers, namely car dealers, seem to be doing it tough as well.

Just look at the share price performance of Automotive Holdings Group Ltd (ASX: AHG) and AP Eagers Ltd (ASX: APE) over the short and medium term to see what I mean.

Downshifting: Relative share price performance over two-year period

Source: Yahoo Finance

For instance, shares in Automotive Holdings have shed half their value over the past two years, while AP Eagers is down 37%. If Carsales.Com’s customers are under stress, it’s hard to imagine how the company could outperform.

Further, this isn’t a comfortable oligopoly. Carsales.Com could face a step-up in competitive pressure, particularly if the merger between Fairfax Media Limited (ASX: FXJ) and Nine Entertainment Co Holdings Ltd (ASX: NEC) goes through.

These media companies own Drive.com.au and CarAdvice.com. The combined entities will pose a bigger competitive threat to Carsales.Com.

What’s more, there are other newer mobile-only rivals nipping at the market leader’s heels, such as CarSwap.

The fact that Carsales.Com has increased its prices to the car dealers will give these challengers a potential point of attack.

However, Carsales.Com may yet surprise on the growth front from its overseas investments. There are few who would argue that the company is not well run.

Hopefully for shareholders, that will be enough to put Carsales.Com back in the fast lane.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Automotive Holdings Group Limited, carsales.com Limited, and SEEK Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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