Short Sellers Circle Top Spanish Stock Despite 23% Rebound

  • Short interest for DIA is the highest among IBEX 35 companies
  • High competition is a key reason to be bearish, JPMorgan says

Shares of Spanish supermarket chain Distribuidora Internacional de Alimentacion SA have been surging, but short sellers are still targeting the company.

Even after DIA has rebounded 23 percent since its 3 1/2-year low in April through Wednesday -- the fourth-biggest surge in the IBEX 35 Index -- it remains the most-shorted stock on the gauge. At 11 percent of shares outstanding, its short interest has more than doubled in the past year and compares with an average 3.1 percent for members of the benchmark measure, data compiled by Markit Ltd. show. The stock slipped 0.5 percent at 9:28 a.m. in Madrid.

While DIA reported an improvement in comparable sales in May, adjusted earnings fell for a third quarter. After surging throughout the 2011-2013 recession when it became the go-to store for Spaniards looking for discounts, its rally came to a halt as the grocer failed to adapt to the changing tastes of consumers benefiting from an improving economy, according to Francisco Salvador, a strategist at FGA/MG Valores. DIA’s focus on acquisitions in recent years has taken a toll on store revamps and hurt its brand, he said.

“DIA’s results improved in the first quarter, but that’s only one good quarter,” Salvador said in a phone interview from Madrid. “Some investors are giving it the benefit of the doubt, but evidently others will want to see a more sustained improvement.”

Despite the recent jump, the shares remain 1.5 percent lower for 2016, even with Spanish retail sales continuing to improve and the economy forecast to grow 2.8 percent this year -- the fastest pace among the largest European countries. Since its record last year, DIA has slumped 30 percent, more than the IBEX 35. The company is also vulnerable to weakness in the emerging markets, which account for about a third of its sales.

“DIA respects all investment decisions, and we understand this situation as one more circumstance in the rules that govern financial markets,” DIA’s press office said in an e-mail responding to a request for comment on the bearish trading.

After getting rid of its underperforming French stores, DIA went on to expand in Spain, buying the Eroski and El Arbol supermarket chains in the past two years. Its recent renewed focus on remodeling had an impact on its financial results, the company said in its May 12 earnings release as it reported an 8 percent drop in adjusted profit.

While the results prompted Morgan Stanley and Exane BNP Paribas to raise their ratings on the stock, not everyone is convinced. JPMorgan Chase & Co., one of the few firms that recommend selling DIA shares out of those tracked by Bloomberg, cited competition as a key reason to stay bearish. The bank noted that short covering -- when traders are forced to buy shares to close their bearish bets -- could explain the recent stock bounce. Short interest has fallen from almost 16 percent in April.

Since the earnings day, AQR Capital Management and Dalton Strategic Partnership are among the firms that have increased their short positions, while UBS Global Asset Management and BlackRock Investment Management have decreased it, data compiled by Bloomberg based on company filings show.

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