Volkswagen Can Thank Lehman, Hedge Funds for Gains

By Alexis Xydias

Oct. 7 (Bloomberg) -- Volkswagen AG, Europe's largest automaker, just became this year's best performing stock on the continent, benefiting from hedge-fund trading strategies and the collapse of Lehman Brothers Holdings Inc.

Volkswagen is up 190 percent this year after surging as much as 55 percent today. The company was one of only four in the Dow Jones Stoxx 600 Index that advanced yesterday in the worst decline for the European gauge since October 1987. The owner of the Audi brand today surpassed Toyota Motor Corp. as the world's biggest carmaker by market value.

With analysts forecasting profit growth will slow to 1 percent in 2009 from 17 percent this year, the Wolfsburg, Germany-based car producer's earnings outlook isn't boosting its price. Instead traders who shorted the shares on expectations they would decline on Porsche SE's bid for a majority stake were forced to close their positions, according to three people in the securities-lending business who declined to be identified. The failure of Lehman, which lent Volkswagen shares to short-sellers, probably helped trigger a so-called short-squeeze, they said.

``This is a popular, crowded short play that has caused the shares to become disconnected with the company's fundamentals,'' said Renaud Berenguier, who advises hedge funds on equity trading at Aurel BGC in Paris. ``You take one of the biggest prime-brokering lenders, and one of the most shorted stocks in Europe, and this is the result.''

Volkswagen Profits

About 15 percent of Volkswagen's common shares as of last month were shorted, or borrowed and sold on expectations they can be repurchased later at a lower price, according to London- based research firm Data Explorers. That was the most in Germany's 30-stock DAX Index.

Net income for Volkswagen, owner of the Skoda and Seat brands, will be little changed in 2009 from the estimated 4.83 billion euros ($6.52 billion) it will earn in 2008, according to the average projection of analysts surveyed by Bloomberg. The German automaker is confident of meeting its 2008 performance targets, Chief Executive Officer Martin Winterkorn said Oct. 1 in a Bloomberg Television interview at the Paris Motor Show.

Volkswagen rose 5.2 percent to 292.35 euros yesterday, the biggest climb in the Stoxx 600, which tumbled 7.6 percent. The carmaker's advance yesterday gave it a 2008 gain that surpassed the 86 percent rise by London-based Enodis Plc, which supplies salad bars, cookers and worktops to U.S. fast-food chains. Volkswagen jumped as much as 55 percent to 452 euros in Frankfurt today, the biggest intraday gain since at least 1989, while the Stoxx 600 fell as much as 1.6 percent.

``This stock has become a barometer of hedge-fund pain'' that rises when markets fall, said Aurel's Berenguier.

`Unprecedented Short Squeeze'

This year's surge left Volkswagen's shares valued at 35.2 times earnings, more than three times as expensive as the other eight companies in the Bloomberg Europe Autos Index. Christine Ritz, a spokeswoman for Volkswagen, said the carmaker doesn't comment on its share price.

Volkswagen's ``current lofty valuation is the result of an unprecedented short squeeze in the stock, driven by the unwinding of several trades popular with hedge funds,'' said Tucker Golden, managing partner at New York-based hedge fund Solas Capital Management LLC.

Natixis Securities analyst Georges Dieng wrote in a Sept. 22 note that short covering has lifted Volkswagen's share price to levels that weren't justified by the carmaker's earnings prospects. New York-based Lehman was ``supposedly a big lender'' of Volkswagen's stock, he wrote, citing market ``assumptions.'' Paris-based Dieng and 31 other analysts tracked by Bloomberg recommend selling Volkswagen's shares, while only two rate the stock a ``buy.'' Six have a ``hold'' or equivalent rating.

27 Percent Jump

Banks that lent Volkswagen's stock to Lehman for use in short sales by their clients probably recalled their loans when the brokerage collapsed on Sept. 15, according to the three people who declined to be identified because the transactions aren't public. In order to keep their client accounts balanced in the meantime, the lenders were likely forced to buy the shares in the open market, the people said.

The process may have spurred Volkswagen's 27 percent jump on Sept. 18, when a recall request would expire under German securities trading settlement periods. The lenders' buying may have sparked further purchases from borrowers of the stock in a so-called short-squeeze.

While Volkswagen's shares rallied, the Stoxx 600 slipped for a fourth session. The next day, Volkswagen had its steepest loss since 1989, falling 14 percent even as the Stoxx 600 surged 8.3 percent, the biggest gain on record.

Lehman's Collapse

Lehman said it had more than $613 billion of debt and $639 billion of assets when it collapsed last month in the biggest bankruptcy in history. The firm was ranked fifth among 26 prime brokers for its services in a survey of lenders by International Securities Finance magazine.

Emma Thorogood, a spokeswoman for PricewaterhouseCoopers, Lehman's bankruptcy administrator in London, declined to comment on the brokerage's equity holdings.

The plan by Stuttgart, Germany-based Porsche, Volkswagen's biggest shareholder, to buy a majority stake in the automaker may have contributed to the number of short bets, Golden said.

Traders wagered that the spread between Volkswagen's regular shares, which carry voting rights, and its preferred stock, which doesn't, would narrow in favor of the latter, Golden said. The voting rights would become less valuable as Porsche, maker of the 911 sports car, increases control.

Porsche said on Sept. 16 that it had raised its Volkswagen stake by 14.4 million shares, to 35.1 percent. The carmaker has said it plans to boost the holding to more than 50 percent by the end of November.

`Driven by Speculation'

Porsche probably acquired an option to buy the extra shares, Deutsche Bank AG's Frankfurt-based analyst Jochen Gehrke wrote in a note in August. The counterparties in this agreement likely bought the stock to hedge their obligations and later lent it to short-sellers in a transaction that may have amounted to about 30 percent of Volkswagen's free float, Deutsche Bank estimated at the time.

Porsche's head of investor relations, Frank Gaube, didn't return two telephone messages seeking a comment.

The spread between the common and preferred shares reached a record 340.47 euros today. The widening of the gap inflicted losses on investors who had bet on a convergence.

``Many investors short the common shares because the valuation is very high,'' said Sven Diermeier, an analyst at Independent Research Gmbh in Frankfurt. ``The fundamental data of the company don't justify the valuations the stock has at the moment. The share is driven by speculation.''

To contact the reporter on this story: Alexis Xydias in London at axydias@bloomberg.net.