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Ask A Fund Manager

The Motley Fool chats with fund managers so that you can get an insight into how the professionals think. In part 1 of our interview, Pengana Capital senior fund manager Rhett Kessler reveals why a big bank is one of his fund’s biggest holdings.

Investment style

The Motley Fool: What’s your fund’s philosophy?

Rhett Kessler: I run the Pengana Australian Equities Fund. I’ve been doing it for 14, almost 15 years. We started three months before Lehman’s went bust. So it was an interesting time.

Fortunately we made money that year, which probably set us up pretty well for the future. Our investment strategy is essentially to a: preserve capital in real Australian dollars; and b: to deliver a low volatility return of 6% above the risk-free rate.

Essentially the way we do that… is to look for companies that with a high degree of certainty, [and] produce robust after-tax cash earnings yields. That means that if I can build a well-diversified portfolio of ever-growing annuity streams, then we’ve fulfilled our investment strategy, and we’ll preserve capital, and make our clients a decent amount of money.

I’ve always felt that we offer – it’s maybe a bit boring – a safe place for people to put their money, particularly in times of volatility. So that they can go off and punt their Bitcoins (CRYPTO: BTC) and cryptocurrencies if they want, or whatever the latest flavour is. But knowing that when they come back to us, we’ll still be ticking along. 

MF: Starting the fund just before Lehman went bust must be the equivalent of someone setting up a fund at the start of last year just before the COVID-19 crash.

RK: Yeah, exactly. And you know, it helps you hone your ability to not only have high conviction but also to really test your ability to reach it. 

We call it reaching across the abyss. Buying things when the underlying fundamentals say you need to – but also get through your vomit factor, which is after you’ve bought something, wanting to walk around your desk and throw up. That’s the hard bit.

MF: To give our readers an idea, what are your two biggest holdings?

RK: The two biggest holdings at the moment are Telstra Corporation Ltd (ASX: TLS) and National Australia Bank Ltd (ASX: NAB). We’re a high-conviction fund, so there’s quite a few that approximate those holdings, but those are the two biggest.

We think [Telstra is] the lowest cost producer of gigs on mobile data, and they’ve got a very nice inflation bond embedded in the NBN recurring revenue stream. It’s a good business with a well thought through turnaround strategy by management.

MF: Is NAB more of a temporary cyclical play?

RK: We were very fortunate to be able to acquire a really big stake at the dip of the COVID crisis when they did that deep discount capital raising. We already had a holding, but that was really big. 

We’ve taken a view that all the banks significantly over-provisioned. Also, I firmly believe that there are two great banking franchises in this country – one is Commonwealth Bank of Australia (ASX: CBA)’s retail, and the other is NAB’s business banking franchise.

We think the new management has a plan, and the competency to be able to significantly improve the operating practices of the business, for our benefit as shareholders. 

What did The Australian say, it was a great quote? It said “You can almost feel the economy going boom” – and not in a bad way, in a good way. The NAB Business Survey, that came out today, certainly demonstrates that in spades, with every single metric going through the roof. And if you want to leverage to this via banks, NAB’s business bank again sits at the forefront of that.

Buying and selling 

MF: What do you look at closely when considering buying a stock?

RK: As a chartered accountant, we always think about 3 things. 

The first one is: Is it a good business? It’s not relative to other businesses but in an absolute sense. The 3 things we look for within ‘Is it a good business’ is: can I say with a high degree of certainty… in what I’m actually buying? So underlying the different earnings components and risk components. Secondly, can I predict with reasonable certainty what the future holds for the company? Thirdly, most importantly, who holds the power in every stakeholder relationship? That’s where we spend most of our time. 

Secondly: Is management trustworthy and competent? 

And then thirdly: Can we buy it at the right price?

There’s a lot of qualitative stuff we look at. And we spend a lot of time trying to understand the language that management is using in describing their business in order to gain confidence. That they’re focused on the right things and that their story is consistent.

MF: What triggers you to sell a share?

RK: For every investment we hold, we have an investment thesis that tells us how we’re going to preserve capital and make money. 

More importantly, we have milestones against which we test that investment thesis. At any stage, those milestones indicate [if] the investment thesis is not playing out as we anticipated, in a material way – then there’s no reason for us to hold it. 

So if it’s not going to be an annuity stream sometime in the future; if management has lied to us and therefore we can’t rely on anything they say; if the industry structure has changed; and sometimes quite simply, if the share price just gets so high that we can’t get an after-tax cash earning sealed commensurate with our requirements, then there’s no point holding it any more.

Tomorrow in part 2 of our interview, Kessler reveals the ASX healthcare share that’s set to explode.

More reading

• ASX 200 Weekly Wrap: After record high, ASX dips on inflation fears
• Top brokers name 3 ASX shares to sell next week
• 2 quality ASX dividend shares for income investors
• What drove the Commonwealth Bank (ASX:CBA) share price this week?
• Top brokers name 3 ASX dividend shares to buy today

Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends Bitcoin. The Motley Fool Australia owns shares of and has recommended Telstra Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

The post Why I’m loving this ASX bank share at the moment: fundie appeared first on The Motley Fool Australia.

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The Carsales.Com Ltd (ASX: CAR) share price has returned from its trading halt this morning and is tumbling lower.

At the time of writing, the auto listings company’s shares are down 7% to $18.17.

Why was the Carsales share price in a trading halt?

Carsales requested a trading halt so that it could raise funds for a major new acquisition.

Last week the company signed an agreement to acquire a 49% stake in United States-based business Trader Interactive for approximately US$624 million (A$800 million). It also has a call option to acquire the remaining interest on specified terms in the future.

Trader Interactive is a leading platform of branded marketplaces in the US. It provides digital marketing solutions and services across commercial truck, recreational vehicle (RV), powersports, and equipment industries.

The business generated adjusted revenue of US$123 million and adjusted EBITDA of US$61 million in 2020. The latter means its EBITDA has now grown by a compound annual growth rate of 13% over the last five years.

Management notes that the acquisition represents a strategically compelling opportunity to further build out its international scale and industry diversification with exposure to attractive verticals in the United States. It is expected to be earnings per share positive on a pro-forma basis, with mid-single digit earnings per share accretion from year one.

Equity raising

This morning Carsales announced the successful completion of the institutional component of its $600 million pro rata accelerated renounceable entitlement offer with retail rights trading.

According to the release, the institutional entitlement offer raised approximately $428 million at the offer price of $17.00. This represents a 12.9% discount to its last closing price of $19.51.

Management advised that the offer was well supported by institutional shareholders, with a take-up of approximately 83% by eligible institutional shareholders.

Carsales’ CEO, Cameron McIntyre, said “We are very pleased with the level of support we have received from our institutional shareholders, in particular domestic institutional investors who took up 99% of their entitlements. We firmly believe that this acquisition creates compelling value for our shareholders through accelerating our international growth strategy by providing us with exposure to a significant market in the United States across attractive non-automotive verticals.”

The company will now push ahead with the retail component of the entitlement offer. This is expected to raise approximately $172 million, taking the total to approximately $600 million. The retail entitlement offer will open on Wednesday 19 May 2021 and close on Wednesday 2 June 2021.

More reading

• 5 things to watch on the ASX 200 on Monday
• Is the Carsales (ASX:CAR) share price in the buy zone after its acquisition?
• 5 things to watch on the ASX 200 on Friday
• Brokers name 3 ASX shares to buy now
• ASX 200 drops again, Pushpay rises, CSR climbs

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has recommended carsales.com Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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The Incitec Pivot Ltd (ASX: IPL) share price is sinking lower on Monday morning.

At the time of writing, the industrial chemicals company’s shares are down 5% to $2.30.

Why is the Incitec Pivot share price sinking?

The reason for today’s weakness in the Incitec Pivot share price was the release of its half year results this morning.

For the six months ended 31 March, the company reported a 6.7% decline in revenue to $1724.1 million. This was driven by a 13% reduction in Dyno Nobel Americas revenue to $671.1 million and a 7% decline in Dyno Nobel APAC revenue to $455.8 million. This offset a 2% lift in Fertilisers APAC revenue to $628.3 million.

Things were worse for its earnings, with Incitec Pivot reporting earnings before interest and tax (EBIT) of $110 million. This was down 30.8% from $159 million in the prior corresponding period. However, this includes a $59 million impact from planned turnarounds and a $14 million impact from unplanned outages.

This led to a 44% decline in statutory net profit after tax to $36 million, earnings per share of 1.9 cents, and a fully franked interim dividend of 1 cent per share.

How does this compare to expectations?

As you might have guessed from the Incitec Pivot share price performance, this result fell short of expectations.

According to a note out of Goldman Sachs, its analysts were expecting the company to report revenue of $1,825 million, EBIT of $171 million, and an interim dividend of 2.2 cents per share.

Management commentary

Incitec Pivot’s Managing Director and CEO, Jeanne Johns, said: “Our first half result was impacted by the COVID delayed scheduled turnarounds as well as some unplanned manufacturing outages. Our underlying explosives and fertilisers business performance was strong, reflecting the continued uptake of our premium technology offering as well as the resilience of our end markets.”

“While the Waggaman plant has demonstrated it’s capable of very good production runs, the recent issues at our plant are clearly disappointing and our expert taskforce is working hard to get the plant back up and running at nameplate.”

She continued: “During the first half of the year, our Americas and Asia Pacific explosives businesses performed well on the back of growing momentum from customers for our premium technology. We are expecting technology growth pull though in our key markets of Australia and the US, along with other markets as they recover from the pandemic.

“Pleasingly, our fertiliser business returned to profit during the half as we responded to stronger seasonal outlook for rain and commodities. As we progress our strategy to become a soil health company, good rainfall events across eastern Australia position us well to deliver for the agricultural sector in the second half.”

Outlook

The company’s CEO, Jeanne Johns, believes Incitec Pivot is positioned for a stronger second half.

She said: ““We are well positioned to deliver a stronger second half, with reduced turnaround activity and favourable commodity pricing and conditions in our key agricultural and resources markets.”

However, no formal guidance has been given for the period or the full year. And judging by the Incitec Pivot share price, investors aren’t overly convinced this will be the case.

More reading

• Why a2 Milk, American Pacific Borate, Appen, & Incitec Pivot are tumbling lower
• Incitec Pivot (ASX:IPL) share price sinks 7% on Waggaman update
• Why the Incitec (ASX:IPL) share price is in the spotlight today
• Looming grocery price shock to impact on these ASX shares

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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The Aristocrat Leisure Limited (ASX: ALL) share price is charging higher on Monday morning.

At the time of writing, the gaming technology company’s shares are up 9% to $40.86.

Why is the Aristocrat Leisure share price is charging higher?

Investors have been buying Aristocrat Leisure shares following the release of a trading update this morning.

As you might have guessed from the Aristocrat Leisure share price reaction, the company has been performing very positively.

According to the release, the Aristocrat Gaming business has experienced exceptional product performance and customer engagement. Together with stronger than expected consumer sentiment and economic conditions in the United States and ANZ region, its profits are growing quicker than expected.

In addition to this, the Aristocrat Digital business has delivered above industry-average growth in bookings. This is translating into revenue and profit growth comparable to the prior corresponding period.

Management notes that the Digital business is benefiting from a diverse portfolio of world-class titles, as well as strong investment in User Acquisition (UA), Live Ops, new game content and features. Overall demand continues to be elevated, compared to pre-COVID levels.

What does this mean for its first half result?

In light of the above, for the six months ended 31 March, Aristocrat Leisure expects to report a normalised net profit after tax and before amortisation of acquired intangibles (NPATA) of $412 million.

This represents growth of 12% compared to the six months ended 31 March 2020.

Normalised earnings before interest, tax, depreciation and amortisation (EBITDA) is expected to be $750 million, representing growth of 6%.

Management commentary

Aristocrat’s Chief Executive Officer and Managing Director, Trevor Croker, commented: “These results reflect the fact that we have the right strategy, and made the right choices to sustain our investment in outstanding people and product, customers, talent and culture throughout the COVID-impacted period.”

“As a result, we have continued to take share and maintained our leadership of key Gaming markets and segments, while also growing our share in Digital games, where we are now a top 5 game publisher in tier 1 Western markets.”

However, the chief executive has warned that economic conditions remain uncertain across its key markets.

He said: “We expect economic conditions across key markets over the full year to remain uncertain, as a result of ongoing COVID-driven volatility. We are closely monitoring key factors including consumer sentiment, gaming venue patronage and currency headwinds. We will continue to rigorously execute our strategy over the second half of fiscal 2021, with increased investment in D&D, UA to support new game launches and existing games and strategic capabilities that will sustain our longer term growth.”

More reading

• 3 buy-rated ASX growth shares for investors in May
• Aristocrat (ASX:ALL) share price up 7% this month, tipped to go higher
• 4 ASX shares to boom when inflation goes up: fundie
• The ASX 200 shares brokers think you should watch out for

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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Shares in ASX technology company Appen Ltd (ASX: APX) have continued to tumble this month. Since the beginning of May, Appen shares have shed almost 30% of their value, dropping to just $11 by the close of trade on Friday.

This means they are now down more than 50% this year and are a whopping 75% short of the 52-week high price of $43.66 they reached in August of 2020. They even recently fell to $10.65, their lowest price in more than two years.

That’s a pretty stunning fall from grace for a former ASX darling and member of the much-vaunted WAAAX group of companies – along with WiseTech Global Ltd (ASX: WTC), Altium Limited (ASX: ALU), Afterpay Ltd (ASX: APT) and Xero Limited (ASX: XRO).

Let’s take a look at what might have caused the big drop in the Appen share price.

Company background

Appen specialises in machine learning and artificial intelligence (AI). The company collects large amounts of data which it then provides to its clients to assist in ‘training’ their AI applications. For example, Appen might provide visual data to a company developing self-driving vehicles in order to assist the AI to recognise crucial objects like traffic lights, other cars and pedestrians.

Appen already has an impressive list of clients that it has partnered with over the years, including international tech giants like Microsoft Corporation (NASDAQ: MSFT) and Amazon.com Inc. (NASDAQ: AMZN).

What sparked the Appen share price decline?

This time last year, things were looking great for the Appen share price. It had shrugged off the March COVID market sell-off and was on its way to an all-time high of $43.66. However, things took a turn for the worse in August and haven’t improved since.

The initial sell-off came around the time Appen released its results for the half-year ended 30 June 2020. Although Appen reported revenue growth of 25% versus the prior comparative period, and a 44% uplift in statutory earnings before interest, tax, depreciation and amortisation expenses (EBITDA), shareholders were clearly unimpressed. It probably didn’t help that the company merely maintained – rather than increased – its full-year outlook. In the week following the release of the results, Appen shares dropped over 20% lower.

Then, in December, Appen was forced to issue a guidance downgrade. Due to a sluggish fourth quarter, Appen revealed that underlying EBITDA for the year ended 31 December 2020 was now expected to fall in the range of $106 million to $109 million. This was a pretty significant drop from the original guidance of between $125 million and $130 million, which had been reaffirmed in the company’s half-year report.

The company finally released its full-year results in February. Underlying EBITDA at least came in towards the top of the revised target, at $108.6 million. Revenues increased by 12% during the year (to $599.9 million), with rapid growth particularly coming from the Chinese market, where revenues increased by 60% quarter-on-quarter.

Appen stated that it expected underlying EBITDA growth of between 18% and 28% during 2021, to around $120 million to $130 million. Even if Appen was to reach that target, it would be hitting those annual earnings levels a year later than it had originally forecast, demonstrating how much of an impact COVID-19-related business headwinds had on its earnings.

More reading

• ASX 200 Weekly Wrap: After record high, ASX dips on inflation fears
• Has COVID-19 killed the ASX WAAAX shares?
• Is the Appen (ASX:APX) share price a bargain or should you wait?
• ASX shares that will benefit from the upcoming index changes
• Why a2 Milk, American Pacific Borate, Appen, & Incitec Pivot are tumbling lower

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Rhys Brock owns shares of AFTERPAY T FPO, Altium, Appen Ltd, and WiseTech Global. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends Amazon and Microsoft. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of AFTERPAY T FPO, Appen Ltd, WiseTech Global, and Xero. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. recommends Altium and recommends the following options: long January 2022 $1920 calls on Amazon and short January 2022 $1940 calls on Amazon. The Motley Fool Australia owns shares of Altium. The Motley Fool Australia has recommended Amazon. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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The BWX Ltd (ASX: BWX) share price is one to watch closely on Monday morning.

This follows the personal care product company’s announcement that it’s set make an acquisition to expand its e-commerce business offering.

What did BWX announce?

In a statement to the ASX, BWX advised that it has entered into an agreement to acquire Flora & Fauna.

Established in 2014, Flora & Fauna is a Sydney-based online retailer that is focused on selling vegan, ethical, and sustainable products. The company has grown to service over 94,000 active customers, with more than 300 brands across multiple categories.

Under the deal, BWX will pay somewhere between $27.9 million to $30.8 million for Flora & Fauna. This is provided that the latter is able to achieve a minimum multiple revenue-based performance for FY21. BWX expects the sale to represent 1.6 times to 1.8 times of actual FY21 revenue.

Flora & Fauna recorded strong sales growth last financial year, with FY20 revenue hitting $12 million. For the current FY21 period, the company is forecasting revenue to reach in the range of $16.4 million and $17.1 million.

BWX noted that the acquisition is unconditional and it has a right to terminate if the pre-agreed conditions are not satisfied. This includes if there is a significant material change or revenue drop below the pre-determined floor before the close of the sale.

BWX will fully fund the deal through its available debt facilities. Completion of the sale is estimated to be in July 2021.

What did management say?

BWX group CEO and managing director Dave Fenlon commented on the acquisition:

We are thrilled to welcome the Flora & Fauna team to the BWX family, and alongside Nourished Life, create a best-in-class ethical online retail platform.

With complementary categories and minimal consumer and SKU overlap, the two brands will benefit from a strategic approach to customer experience and promotions, as well as operational efficiencies.

Flora & Fauna founder and CEO Julie Mathers added:

This is a really exciting step for Flora & Fauna and the wider industry. BWX offers Flora & Fauna the opportunity to grow even further as a business with strong alignment about having a positive impact on the planet, people and animals.

BWX share price snapshot

Over the past 12 months, the BWX share price has posted a gain of almost 30%, with year-to-date performance above 10%.

Based on the current share price of $4.59, BWX commands a market capitalisation of around $644 million.

More reading

• US market bounces back, ASX 200 tech shares on watch
• These are the 10 most shorted shares on the ASX
• Why our most popular ASX mining shares are set to tumble this morning
• The Domino’s (ASX:DMP) share price is up 22% this year
• ASX 200 Weekly Wrap: After record high, ASX dips on inflation fears

Motley Fool contributor Aaron Teboneras has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended BWX Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

The post Why the BWX (ASX:BWX) share price is on watch this morning appeared first on The Motley Fool Australia.

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Wall Street staged a much-needed rebound on Friday, softening what was otherwise a challenging week for most sectors. What does this mean for S&P/ASX 200 Index (ASX: XJO) tech shares?

The Nasdaq Composite (NASDAQ: .IXIC) led the pack, running 2.32% higher while the S&P 500 Index (SP: .INX) and Dow Jones Industrial Average Index (DJX: .DJI) improved a respective 1.49% and 1.06%. 

The strength of the US market, especially in the Nasdaq, could carry over to ASX 200 tech shares on Monday. Let’s take a closer look. 

Will ASX 200 tech shares follow Nasdaq? 

US tech mega-caps including Tesla Inc, Facebook Inc, Apple Inc, Amazon.com Inc, Netflix Inc, Microsoft Corporation and Alphabet Inc all finished Friday’s session between 1.90% and 3.50% higher.

This could see some life come back into the beaten up S&P/ASX 200 Info Tech Index (ASX: XIJ), which slipped 6.8% last week and is down an ugly 19.4% year to date. 

The blame could be attributed to weakness in ASX 200 tech heavyweights including Afterpay Ltd (ASX: APT), Xero Limited (ASX: XRO) and Wisetech Global Ltd (ASX: WTC). 

Following the Nasdaq’s bounce on Friday, investors are likely to be keeping a close on these ASX 200 tech shares today.  

Could ASX 200 BNPL shares catch a break? 

The buy now, pay later (BNPL) sector has come under relentless selling pressure of late with the likes of Afterpay breaking below the $100 level earlier this month and closing at an 8-month low of $86.35 on Friday.

Shareholders will be hoping the rebound in US tech and 11.64% surge in US-listed BNPL company Affirm Holdings Inc (NASDAQ: AFRM) will bring some strength back into embattled ASX BNPL shares. 

PointsBet share price on watch 

The PointsBet Holdings Ltd (ASX: PBH) share price has struggled this month despite positive announcements from the company including a strong third-quarter update, the launch of its iGaming platform in Michigan and a small US$2.9 million acquisition. 

Similar to the Affirm situation above, PointsBet’s largest US competitor, Draftkings Inc (NASDAQ: DKNG) and key US partner Penn National Gaming Inc (NASDAQ: PENN) both jumped a respective 9.51% and 6.19% higher on Friday. Investors will be hoping this translates into gains for the PointsBet share price when the market opens this morning.

Foolish takeaway

After being major beneficiaries of the pandemic, ASX 200 tech shares have been struggling recently. If tech shares do manage a partial rebound on Monday, the question will be whether the move is just a one-off bounce or part of a broader recovery.

More reading

• ASX 200 Weekly Wrap: After record high, ASX dips on inflation fears
• 3 great ASX tech shares to buy
• These were the worst performing ASX 200 shares last week
• ASX 200 rebounds, Treasury rises, Xero falls
• Why De Grey, GrainCorp, Pilbara Minerals, & Xero shares are dropping

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Kerry Sun has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Facebook, Microsoft, Netflix, Pointsbet Holdings Ltd, and Tesla. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of AFTERPAY T FPO, WiseTech Global, and Xero and recommends the following options: long January 2022 $1920 calls on Amazon, short March 2023 $130 calls on Apple, short January 2022 $1940 calls on Amazon, and long March 2023 $120 calls on Apple. The Motley Fool Australia has recommended Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Facebook, Netflix, and Pointsbet Holdings Ltd. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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At the start of each week I like to look at ASIC’s short position report to find out which shares are being targeted by short sellers.

This is because I believe it is well worth keeping a close eye on short interest levels as high levels can sometimes be a sign that something isn’t quite right with a company.

With that in mind, here are the 10 most shorted shares on the ASX this week according to ASIC:

• Flight Centre Travel Group Ltd (ASX: FLT) is now the most shorted ASX share after its short interest rose to 10.4%. Short sellers have been increasing their positions since the release of a trading update out of the travel agent. That update revealed that its second half loss is expected to be as large as the one recorded in the first half. This was materially more than the market anticipated.
• Kogan.com Ltd (ASX: KGN) isn’t far behind after its short interest jumped to 10%. Once again, a recent trading update has caught the eye of short sellers. That update revealed that the ecommerce company’s growth has slowed, margins have contracted, and that it is having issues with inventory.
• Resolute Mining Limited (ASX: RSG) has seen its short interest rise week on week to 9.8%. This gold miner’s shares have come under pressure due to regulatory issues at its Bibiani operation in Ghana and its disappointing production and guidance.
• Tassal Group Limited (ASX: TGR) has short interest of 9.6%, which is flat week on week. This high level of short interest appears to have been driven by weakness in salmon prices.
• Temple & Webster Group Ltd (ASX: TPW) has seen its short interest remain firm at 9.4%. This online furniture and homewares retailer appears to have been targeted by short sellers due to plans to invest materially in its growth at the expense of margins.
• Webjet Limited (ASX: WEB) has seen its short interest rise week on week to 8.9%. Concerns over the stuttering travel market recovery and its valuation appear to be weighing on investor sentiment.
• Megaport Ltd (ASX: MP1) has short interest of 8.1%, which is up again week on week. Short sellers may be going after the Network as a Service provider due to concerns over rising bond yields and its premium valuation.
• Inghams Group Ltd (ASX: ING) has 7.9% of its shares held short, which is down slightly week on week. Investors may be nervous about its major contract renewal negotiation with Woolworths Group Ltd (ASX: WOW) and the sudden exit of its CEO.
• Zip Co Ltd (ASX: Z1P) has short interest of 7.2%, which is up week on week. This high level of short interest is likely to be due to valuation concerns. Zip and fellow BNPL providers trade on very high multiples.
• Metcash Limited (ASX: MTS) has seen its short interest edge lower again to 7.1%. Reports that trading conditions are reverting back to normal again in the supermarket industry could be weighing on sentiment. These trends appear to be favouring the big two supermarket chains ahead of independents.

More reading

• ASX 200 Weekly Wrap: After record high, ASX dips on inflation fears
• 2 growing ASX dividend shares to buy
• 2 top ASX growth shares rated as buys in May
• 2 fast-growth ASX tech shares that are being sold off
• These were the best performing ASX 200 shares last week

James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends MEGAPORT FPO. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Kogan.com ltd, Temple & Webster Group Ltd, and ZIPCOLTD FPO. The Motley Fool Australia owns shares of and has recommended Webjet Ltd. The Motley Fool Australia has recommended Flight Centre Travel Group Limited, Kogan.com ltd, MEGAPORT FPO, and Temple & Webster Group Ltd. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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Several popular ASX mining shares are set to fall even as the market is predicted to open firmly in the black this morning.

The futures market is pricing in a 0.7% jump in the S&P/ASX 200 Index (Index:^AXJO). This is thanks to positive leads from Wall Street over the weekend.

But mining heavyweights like the BHP Group Ltd (ASX: BHP) share price, Rio Tinto Limited (ASX: RIO) share price and Fortescue Metals Group Limited (ASX: FMG) have not been invited to the party.

Iron ore price crash

This is because the Fastmarkets MB iron ore price crashed 12.1% to US$208.79 a tonne on Friday, reported the Australian Financial Review.

The big sell-off comes on reports that Chinese regulators are clamping down on raging prices after the commodity hit a record high of US$237.57 a tonne on Wednesday.

The BHP share price and Rio Tinto share price on the London Stock Exchange dived 1.3% and 2.8%, respectively. The ASX prices for these mining giants are likely to follow in sympathy.

China trying to derail iron ore’s record bull run

Chinese authorities in steel producing cities of Shanghai and Tangshan warned steel mills “against price gouging, collusion and spreading false market information”.

Some experts believe the iron ore price was set to pullback even without the intervention of the Chinese government. The price of the steel-making ingredient has been rocketing and a period of consolidation is to be expected.

But the jawboning by China has certainly exacerbated the fall. No one has any doubt that the authorities there will wield a big stick to ensure compliance.

Price increases “forbidden”

The Shanghai market regulator said in a statement on Friday forbidding steel producers to increase prices significantly unless it was due to a big rise in production costs.

The high price of steel is one major tailwind for the strong iron ore price increase. If steel mills can make solid profit margins, they would be happy to chase the iron ore price higher.

Ironically, the Chinese Community Party has a part to play in the iron ore windfall that they are trying desperately to quell.

ASX mining shares benefitting from China-Australian tensions

One of the other reasons for the mineral’s bull run is fear that China would ban the import of Australian iron ore – just as it’s done with coal, wine, barley and a host of other Aussie exports.

The big question now for investors is whether this marks the end of the iron ore bull run. Some experts believe that the iron ore price has peaked this cycle, while others think this is only the start of a supercycle.

Have iron ore prices peaked?

The bulls point to a drop in iron ore inventories at Chinese ports. The Mysteel’s weekly survey of 45 ports showed that inventory dropped for the third week to a three-month low of 125.3 million tonnes on May 13.

OCBC economist Howie Lee predicting that the iron ore price will test US$250 a tonne in the next 12 to 18 months.

“China’s new infrastructure projects have been estimated to total 10 to 20 trillion RMB from 2021 to 2025, which means the demand for raw materials now is only just beginning,” The AFR quoted Mr Lee as saying.

ASX mining shares set for a profit upgrade

Regardless of whether the bulls are right, ASX mining shares are set for profit upgrades unless iron ore crashed by more than 50% from here.

Most analysts have only assumed a price or US$100/tonne or less in their valuation calculation for ASX miners.

More reading

• ASX 200 Weekly Wrap: After record high, ASX dips on inflation fears
• Which ASX 200 iron ore share has gained 45% in 2021?
• Top brokers name 3 ASX dividend shares to buy today
• The ASX miners with the biggest valuation upside to record iron ore prices
• ASX 200 shares hit all-time high! How did we get here?

Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited, Fortescue Metals Group Limited, and Rio Tinto Ltd. Connect with me on Twitter @brenlau.

The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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The Domino’s Pizza Enterprises Ltd (ASX: DMP) share price has had a bumper start to 2021.

Shares in the pizza behemoth have soared more than 22% since the start of the year. Despite recent market volatility, the Domino’s share price has remained resilient to trade near all-time highs.

Read on to find out more about the Domino’s share price.

What’s been fuelling the Domino’s share price?

Along with online retailers, fast food chains like Domino’s have been beneficiaries of the COVID-19 pandemic. During the last year, Domino’s has reported promising international growth and delivered a strong performance in the first half. 

Analysts are also bullish on the outlook for Domino’s, citing the company’s operating leverage to fuel growth. In addition, analysts have also noted the company’s strong balance sheet that could help Domino’s expand its brand.  

How has Domino’s been performing?

Earlier this year, Domino’s released mouth-watering results for the first half of FY21. For the 6 months ending 31 December, the company delivered strong sales and earnings growth.

For the first half, Domino’s reported a 16.5% increase in total global food sales of $1.84 billion. In addition, the company grew earnings before interest and tax (EBIT) by 32.3% for the period to $153 million. Domino’s also reported strong top-line growth for the period. In the first half, the company opened 131 new stores whilst also reporting an 8.5% increase in same store sales growth.

Furthermore, Domino’s also delivered on the bottom line. The company reported a 32.8% increase in underlying net profit after tax of $96.2 million. Free cash flow also improved by 50.3% for the period to $124.4 million.

According to Domino’s management, the strong performance during the pandemic is a reflection of the company’s long-term strategy. The Domino’s share price jumped by around 7.5% on the day the company’s half-year results were released.

Outlook

Domino’s holds the master franchise licence to the Domino’s brand in Australia, New Zealand, France, Belgium, the Netherlands, Germany, Japan and Denmark. The company currently operates more than 2,700 franchised and corporate-owned stores in these locations.

According to its latest shareholder meeting, Domino’s has a target of 5,550 stores by FY25. The company also noted that Germany and Japan are key growth markets that continue to go from strength to strength.

Domino’s expects Japan to overtake its Australian and New Zealand stores as the company’s largest market by October. In addition, Domino’s expects sales and profits in Japan to overtake Australian market results in the next few years.

Domino’s share price snapshot

In addition to rallying 22% so far in 2021, the Domino’s share price has climbed by almost 83% over the past 12 months. At Friday’s close, Domino’s shares closed the day 0.37% higher at $105.83. The company has a market capitalisation of around $9.16 billion.

More reading

• 2 top ASX growth shares rated as buys in May
• 2 quality ASX shares that could be fantastic buy and hold options
• 2 top ASX growth shares rated as buys
• Wrong… but still right!
• Why Afterpay, ANZ, Domino’s, & Flight Centre shares are tumbling lower

Motley Fool contributor Nikhil Gangaram has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Dominos Pizza Enterprises Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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