This stock could be shaping up as a short-selling favourite among professional investors in the near-term after Morgan Stanley issued a "tactical" sell recommendation on the DuluxGroup Limited (ASX: DLX) share price.
The DLX share price gave up early gains to trade just a bit above breakeven in late morning trade of $7.18 even as the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index is rallying 0.8% as global risk appetite improved.
But the stock could keep underperforming for a while yet if Morgan Stanley is right. The broker is predicting that the stock will fall relative to the broader market over the next 60 days and says there is a 70% to 80% chance of the stock underperforming.
Painting a bearish picture
This is primarily because of its upcoming first half profit results, which are scheduled for release next month.
"We see a strong likelihood of an unfavourable 1H19 earnings release as a result of a declining Australian housing market and weaker consumer," said Morgan Stanley.
"We believe these factors create downside risk to consensus estimates for FY19 and beyond. We believe downside earnings risk may also prompt a derating as the DLX PE premium to peers reduces."
The stock is trading close to 18 times FY20 consensus price-earnings and DuluxGroup will be cycling a strong 1HFY18 when it posted a 9% jump in net profit to $79.2 million and a 4.2% increase in sales to $918.1 million.
Short-selling attack
This could be difficult for the paint maker to repeat given the slump in the housing market and a weakening residential renovation/construction activity.
Morgan Stanley isn't alone in its dire assessment of DuluxGroup. Bell Potter's high-profile stock-picker, Richard Coppleson, highlighted the stock as one of his favourite short-selling candidates for 2019.
There isn't much short-selling interest in the stock at the moment with the latest ASIC data indicating that only 2.4% of its total shares on issue are being short-sold, although this could change.
Short-selling is the process of borrowing a stock to sell on-market in the hope of buying it back at a lower price later to profit from the difference.
DuluxGroup isn't the only one exposed to the housing headwinds. The CSR Limited (ASX: CSR) share price is also under pressure along with shares in Bunnings owner Wesfarmers Ltd (ASX: WES).
Morgan Stanley has an "underweight" recommendation on DuluxGroup with a price target of $6.50 per share.
