It’s Australia’s most-shorted stock, but only one of the 10 analysts covering it considers it a sell.

Meet Aconex Ltd., a Melbourne-based company whose software helps architects and developers work together in the cloud. If you believe the sell-side, shares will rise almost 8 percent over the next year. Bears, however, have a completely different opinion: their bets against Aconex are near the highest on record -- and the most among 933 stocks listed down under for which data are available.

While it’s far from uncommon for investment bank analysts and short sellers to take diverging views, seldom has the contrast between optimism and pessimism been more stark. Generally, the most-shorted stock in a market will have at least a few sell ratings.

“The analysts have been part of the hype,” said Stephen Mayne, a director at the Australian Shareholders Association, which promotes the interests of retail investors. “Many of the sell-side analysts have potentially gotten too close to the company.”

Aconex’s Leigh Jasper, co-founder and chief executive officer, declined to discuss the short interest but said he has faith in the company’s prospects.

“It’s not for us to comment on the market,” Jasper said by email. “The company has doubled revenues over the last two years and we are confident of increasing annual revenues by at least 20 percent over the medium to long term, underpinned by the huge opportunity to further penetrate the world’s largest construction markets.”

For a long time, the bulls were right. Aconex began a rapid ascent after going public in December 2014. In less than two years, the stock more than quadrupled.

The company regularly beat revenue forecasts, winning new customers and charging recurring fees for use of its software, a high-margin model used by many cloud companies. With a gross margin higher than 70 percent and annual revenue topping A$100 million ($76 million) in 2015, it was the leader in the nascent construction-collaboration software market, which could be worth billions.

Forecast Cut

In the middle of last year, Aconex shares started falling after it narrowly missed analysts’ revenue estimates. Sentiment on the stock was also hurt when Jasper and fellow co-founder Rob Phillpot sold some shares -- though the pair are still among the top three holders.

At the end of January, Aconex plunged 45 percent on one day after it unexpectedly cut its revenue forecast, citing uncertainty in the construction market caused by the Brexit vote and Donald Trump’s election. Since its peak in July, Aconex has lost 53 percent of its value.

Short sellers are betting the decline is far from over. Short interest in Aconex stood at 25 percent of the free float as of Monday, near the record 26 percent on Jan. 30, according to IHS Markit data. That’s the highest among the 200 stocks in the country’s benchmark index.

More Misses

Bears believe Aconex will miss even lowered sales targets, said Ben McGarry, the portfolio manager at Sydney-based Totus Capital Pty, who closed a short position in Aconex after the January announcement. He was short because of the company’s expensive valuation and cash-flow concerns, he said.

Aconex’s profits appear higher because it capitalizes a “large chunk” of development costs, McGarry said. Aconex says it adheres to International Financial Reporting Standards and has always been transparent, reporting all research spending and expensing all sales and marketing costs upfront even though its average contract spans several years.

“The stock is still mindbogglingly expensive,” said McGarry, who doesn’t have a short position now because he can’t find shares to borrow. Aconex trades at about 111 times estimated earnings.

In October, a lone sell-side analyst joined the bears, when APP Securities Pty’s Russell Wright cited valuations as the reason for initiating coverage with an underperform recommendation, predicting the shares would fall 16 percent in a year. Wright declined to comment further.

Still Bullish

But most analysts hold fast. Five recommend buying more shares, while four have neutral ratings. Their price targets for the stock started falling in October, but they still see a 7.8 percent gain over the next 12 months.

The company’s “earnings power is clear” and the longer-term contracts that it’s winning will solidify its position as the global leader in construction-collaboration software, Morgan Stanley’s James Bales wrote in a Feb. 21 note. Bales wasn’t available to comment.

The most-shorted stock on the S&P 500 Index, measured by short interest as a percentage of the free float, is sportswear company Under Armour Inc. Of the 35 analysts who follow the company, five say sell. Seven analysts recommend selling shipper Kawasaki Kisen Kaisha Ltd., short sellers’ biggest bet by that metric on a member of Japan’s Nikkei 225 Stock Average. Eight say investors should unload Want Want China Holdings Ltd., the most-targeted stock on Hong Kong’s benchmark gauge.

For Totus Capital’s McGarry, analysts’ love for a company such as Aconex can even be a reason to take the other side.

“The sell-side have tended to be lagging indicators on stuff like this,” said McGarry, who also bet against Valeant Pharmaceuticals International Inc. “There’s often an opportunity in going the other way from broker cheerleading.”

Source:
courtesy of BLOOMBERG

by Vivek Shankar

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