(news & commentary)
Bloomberg late last week reported that Nikon is the most shorted of the Japanese tech stocks, with 16% of its outstanding shares covered by a short position as of last week.
Shorting a stock means that you borrow stock hoping to replace it at a lower price in the future. You’re betting that the company will be worth less in the future than it currently is.
Strange thing is, Nikon’s stock is defying gravity at the moment. It’s up 7.8% for the year, and is currently trading around a PE of 30, the kind of number you’d normally associate with a growth company. Bloomberg attributes the current value bulge to Nikon’s producing higher net income for their just reported third fiscal quarter. I don’t.
I believe the upward stock movement is the result of Japanese banks, investment groups, and individual investors betting against Western hedge funds. Essentially, betting on the home team. Given the yen’s recent reversal against the dollar, the on-going decline in camera sales, and Nikon’s lack of momentum in any of their businesses, there’s absolutely nothing that suggests in their numbers that Nikon stock is undervalued and that it can grow out of that high PE.
All this short action has implications for camera customers. If Bloomberg is right that the recent Nikon stock price rise is attributable to net income increasing in the recently announced quarter, it means that Nikon is under even more pressure to lower costs, as that’s one of the key drivers of keeping their net income up. Even if Bloomberg is wrong about the reasons behind the stock rise, it doesn’t change the management task at the top one iota: Nikon needs to appear to do something to deserve that 30 PE.
While all of us who went to MBA school learned about markets “always correcting to the right value,” what actually tends to happen in real life is that they over correct. Nikon probably deserves a PE in the 14-18 range, depending upon how you assess valuation. The short sellers seem to know that. The real question is how long those other 84% will cling to their belief that Nikon is valued correctly at a PE of 30.
That’s actually difficult to predict in a market where we have negative interest rates. The implication of that is that just leaving money in the bank losses you money.
And no, this is not an article predicting that Nikon is about to collapse. It’s an article that says that Nikon is under increasing pressure to produce better results. Those are not the same thing. But one thing I’ve written about for some time is the slow collapse of Nikon customer support. The kind of pressure Nikon is currently under is not likely to reverse that, as customer support is looked at as an expense by almost every business like Nikon.