PARIS, Nov 29 Hedge funds are increasingly betting against European tech shares, targeting companies hit hard by a sluggish global economic outlook and those struggling with stiff competition in the mobile business.
Short sellers, who profit from falling stock prices by borrowing shares, selling them, then buying them back more cheaply, -- a popular hedge fund strategy -- are particularly targeting chip makers and telecom gear producers such as Aixtron , Alcatel-Lucent and Nokia.
Negative sentiment towards Nokia has reached such heights, however, that short-selling bets could backfire and spark a "short-squeeze", sending the stock sharply higher, a number of traders warned.
According to Markit, which provides securities lending data, demand to borrow stocks in the tech sector has been on the rise since early September, with 6.7 percent of outstanding shares out on loan, making it by far the most shorted sector in Europe.
By comparison, the level of short selling in the broad STOXX 600 index is 2.7 percent and only 1.5 percent for shares of financial institutions, the big targets of short sellers at the peak of the euro zone debt crisis.
"There isn't one big issue weighing on the (tech) sector, but a series of challenges: a grim revenue outlook for some, difficult restructuring or market share loss for others," said David Thebault, head of quantitative trading at Global Equities.
"Investors are just turning to other sectors offering better value and better visibility."
German chip equipment maker Aixtron, which last month warned it would post a bigger-than-expected operating loss for the year, is seeing the highest demand to borrow its stock, with 23.4 percent of its shares on loan, according to Markit.
Bigger peers Infineon and ASM International are also in the crosshairs of short sellers, with respectively 7.2 percent and 10.9 percent of shares on loan.
Echoing problems faced by U.S. rivals Intel and Texas Instruments, Infineon recently warned it expects revenues to fall 5 to 9 percent next year.
"Chipmakers are extremely dependent on two things: consumer spending, which isn't going anywhere at the moment, and capital expenditures," Thebault at Global Equities said.
Companies might be full of cash, but with no visibility for at least two to three quarters, they keep postponing all spending plans."
Overall, the chip market is going through a rough period, with cut-throat competition, while sectors from consumer electronics to automotive are slowing down. According to the Semiconductor Industry Association, chip sales have dropped 5 percent this year.
The growing negative sentiment has also been visible in investment flows, with tech sector funds suffering outflows in the past eight weeks, according to EPFR Global.
Despite the challenging economic environment, the chip sector -- praised for its resilience until very recently -- still trades at a premium to the overall market, making chipmaker shares even more attractive as short-selling targets.
Infineon, whose stock is flat on the year, trades at 17 times expected 2013 earnings and ASM, up 16 percent year-to-date, trades at 12.8 times expected earnings, well above a forward price-to-earnings ratio of 11 for the STOXX 600 index, according to Thomson Reuters data.
RISK OF SHORT SQUEEZE
Short sellers have also been particularly targeting telecom gear maker Alcatel-Lucent and mobile phone producer Nokia.
But the two stocks, with respectively 15.6 percent and 18.8 percent of their shares on loan, have tumbled about 30 percent this year and have lost nearly two-thirds of their market value since the end of 2010, making a short selling bet on the already battered stocks more risky.
"Nokia's stock is a ripe short-squeeze candidate, with almost all the stock that can be borrowed being on loan," Markit analyst Alex Brog said.
Short sellers scrambled to cover their positions last week after a post on Nokia's German Facebook page said some stores had sold out of its new Lumia smartphones, Brog said.
Nokia, once the world's biggest mobile phone maker and a trail-blazer in the sector, has pinned its hopes on the new Lumia to reverse a decline in smartphone market share lost in recent years to Samsung and Apple.
"The holiday shopping period will be crucial for Nokia, but short sellers are already starting to feel the heat, with the risk looking increasingly on the upside," Saxo Banque senior sales trader Alexandre Baradez said.
"In terms of technical analysis, the trend has turned positive on Nokia's stock, which has crossed above its 200-day moving average. That's quite a bullish signal."
Further strong gains in the stock could prompt short sellers to unwind their negative bets by buying back the shares, which would push prices even higher, triggering a sharp rally called "short squeeze".
Copyright 2010 by Reuters. All rights reserved.
Copyright 2013 Thomson Reuters. Click For Restrictions