Investors in Pets at Home Group (LSE: PETS) have had a rough year. After the shares started to slide at the beginning of 2016, as concerns about the health of the UK retail industry grew over the summer, the stock lost around a third of its value. A rally since has helped reduce the losses, but the shares are still lower by 9%, excluding dividends, year-to-date.
It looks as if traders believe that there’s further pain ahead for Pets as 10% of the companies shares remain out on loan to short sellers.
Further declines ahead?
Short selling involves borrowing shares in the hopes that they can be returned for less than their initial value, producing a profit for traders. And watching short interest is a great way to gauge market sentiment towards a company.
With a short interest of 10%, Pets is one of the top 10 most hated companies in the UK. It’s easy to see why traders have taken such a dislike towards the firm. Over the next two years, analysts are predicting a fall in pre-tax profit from £95.8m for the fiscal year ending 31 March 2017 to £85m for the year ending 31 March 2019. This is despite the fact that analysts are projecting revenue growth of 10% for the same period.
Falling earnings and growing revenues signal margin contraction, which is never a good sign. Earnings per share are projected to decline by around 10% over the next two years. However, despite this dismal outlook, the shares still trade at a forward P/E of 15.7. To me, this valuation seems unwarranted. A mid-teens multiple is usually attached to companies growing earnings at a double-digit rate. A more suitable valuation for Pets would be around 12.8 times forward earnings, in line with the sector average. According to my figures, such a valuation would mean a share price of 172p, 21% below current levels.
Stuck in a rut
Traders seem to be equally negative on the outlook for Aggreko (LSE: AGK). With 9.3% of the company’s shares out on loan to short sellers, Aggreko is the 10th most disliked share in the UK.
From a high of 2,500p per month, shares in the portable power generation company slumped to a low of 790p at the end of 2016 and have struggled to recover since.
The company’s problems stem from the oil price downturn. Two-fifths of revenues come from utility companies, with a further fifth from the oil, gas and refining industry. Poorly put together legacy contracts haven’t helped either with the company warning at the beginning of this year that the renegotiation of Argentinian agreements would hit revenues.
Just like Pets, Aggreko appears overvalued compared to its growth potential. The shares trade at a forward P/E of 16.5, despite the fact that no growth is projected this year. I believe a more suitable valuation would be in the low double-digits, giving a share price of around 700p, more than 20% below current levels.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.