By Alexis Xydias
Dec. 18 (Bloomberg) -- Hermes International SCA short sellers almost doubled their bets against the stock this year, with 800 million euros ($1.15 billion) of wagers that a drop in consumer spending would drag down the shares. They were wrong.
Hermes is the only European luxury stock to gain this year, defying “sell” calls by 20 brokerages. Analysts say funds that track indexes were probably forced to buy more stock than short sellers were expecting, since the company’s weighting doesn’t reflect the limited supply of shares.
“The stock’s behavior has been a conundrum and we are likely to see buying pressure stay,” said Gregory Jette, an analyst at Jefferies International Ltd. He still says Hermes is a sell and “fundamentally overvalued” at 38 times earnings after its 24 percent gain this year.
About 7 percent of Hermes shares are on loan, mostly to speculators who sold them hoping to buy them back for less, according to researcher Data Explorers. That compares with 4.25 percent at the start of the year.
Hermes’ defiance of short sellers evokes Volkswagen AG’s 97 percent surge this year, which led to losses for investors including Germany’s billionaire Merckle family and David Einhorn’s Greenlight Capital hedge fund.
“Recent share-price moves are Volkswagenesque,” said John Guy, an analyst at MF Global in London. He’s rated Hermes “sell” since Oct. 28, saying it’s “artificially supported.”
Hermes shot to a record in October, when the MSCI World Index had its worst month ever. A month after the October share- price spike, Paris-based Hermes said third-quarter sales growth slowed to a third of the prior quarter’s pace. The stock is up 13 percent since that update.
Most Expensive Stock
The company has said some 28 percent of the stock is freely traded, with 72 percent held by its controlling family. Yet the Euronext puts the so-called free float at 65 percent, as does MSCI, the compiler that has included Hermes in global, European and French benchmarks.
That’s because some heirs’ stakes are small enough to avoid reporting rules in France, meaning they’re considered free float even though they probably won’t be traded on the market.
The shares have also been occasionally propped up by speculation Hermes will be sold, which Chief Executive Patrick Thomas has repeatedly denied. Hermes didn’t respond to two requests for comment for this story.
Like its 4,000-euro ($5,800) Kelly bags, Hermes’ shares are expensive, trading at almost five times the Bloomberg European Fashion Index’s 8.3 price-earnings ratio. It’s the only stock to rise more than 1 percent in the Fashion Index or France’s SBF 120 Index of mid- and small-capitalization stocks. No analysts rate Hermes “buy.”
CAC 40 Potential
Analysts say the threat of inclusion in France’s benchmark, the CAC 40, may produce more buying pressure from index trackers and spook hedge funds into repurchasing stock, bailing out of short trades at a loss. A committee reviews CAC 40 membership every three months, with the next revision due by early March.
Societe Generale SA has estimated some 20 billion euros from passive funds track the CAC 40. The committee governing the index doesn’t give interviews, said Frederique Vigozzi, a spokeswoman for Euronext, which runs the Paris bourse.
Hermes is the best candidate “according to the committee’s metrics” of free float and trading volume, and is a more likely “quantitative” choice than either caterer Sodexo or retailer Casino Guichard-Perrachon SA, Exane analysts wrote last month. The Conseil has discretion to disregard those criteria, Exane said. On Nov. 27, the CAC 40 was left unchanged.
Volkswagen Trade
In October, Volkswagen short sellers rushed to exit their trades as the carmaker’s biggest investor, Porsche SE, disclosed options positions aimed at lifting its stake. Volkswagen short sellers were only able to find stock at high prices.
While there are stocks with a higher short interest in the SBF 120, Hermes has been the only short gone awry for the whole of 2008, Data Explorers statistics show.
“There’s a bit of irony that hedge funds are losing money first, courtesy of the maker of the cars they drive, and then a second time by the company that makes the bags for their wives,” said Luis Benguerel, a trader at Interbrokers Espanola SA in Barcelona. He said he was “long” Hermes this year and sold the shares at about 110 euros to lock in his gains.
To contact the reporter on this story: Alexis Xydias in London at axydias@bloomberg.net
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