Reliance Worldwide Corporation Limited (ASX: RWC) shares have seen an increase in short selling interest over the last month. Is it time to join the short sellers and dump your Reliance Worldwide shares?
Key Knowledge: What Is Short Selling & How Does It Work?
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About Reliance Worldwide
Reliance Worldwide Corporation is an Australian plumbing supplies and water solutions business, perhaps best known by plumbers for its SharkBite pipe connector. It is the world’s largest manufacturer of push to connect plumbing fittings and specialist water control valves.
Short Sellers Are Interested
According to ASIC’s short register, the number of short sellers targeting Reliance Worldwide has been steadily increasing lately. As of 30th April 2019, the shorts had reached 8.04% of all outstanding Reliance shares. That’s a lot, and it’s up from about 5% in January.
Why Are They Shorting?
In February this year, Reliance released their 1H19 report which had plenty of positive news. Net sales were up 50%, adjusted EBITDA was up 65% and the performance of John Guest (a UK-based acquisition) was positive.
The day after this report though, Chairman Jonathan Munz announced his retirement and sold his remaining shares. Munz owned 100% of Reliance for 30 years and retained 30% when the company listed in 2016 but has since then sold all of his shares. The shares were sold at a 4% discount to the prior trading day’s price and the shares subsequently fell.
It seems that short sellers are concerned by the departure of the Chairman and the potential impact Brexit could have on John Guest in the UK. In investing, when an ‘insider’ like Munz sells, analysts should question if he knows something they don’t.
Also worth noting is that Reliance shares trade at a high P/E ratio (around 38x), but has a return on equity (ROE) of only 4.6%. These figures can make the company look expensive compared to its competitors.
How About The Strong Growth?
While Reliance shares trade on a high P/E multiple, the 1H19 report also shows a high growth rate that may support the current valuation. In fact, there are plenty of valuations found online, from trustworthy sources, that put a ‘target’ price on Reliance at over $5 per share. The share price at the time of writing is around $4.67.
While there may be some case for the short sellers, I think the growth rate justifies the current price. I may not necessarily be rushing to buy the shares, but I wouldn’t be short selling either.
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Disclosure: At the time of writing, Max does not own shares in any of the companies mentioned.
