Most Shorted Stocks #2 - OpenTable
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I recently read an article that outlined the most shorted stocks in the market, based on percentage of shares sold short. Stocks that are shorted always fascinate me, because without leverage, the total percent that can be gained is 100%. In the traditional long trade, there is no limit to how much you can make. I guess by nature I root for the underdog, so I wanted to see if any of these most shorted stocks might represent a buying opportunity. Stocks with a heavy short interest can be volatile, but if the shorts are wrong you can see big gains in a short (pun intended) amount of time. The company ranked #2 most shorted stock by percentage of shares, is OpenTable (NASDAQ: OPEN) with 44.4% short interest.
I've written about OpenTable before (you can find the full post here), but in summary I think the shorts are wrong on this trade. There have been several developments since my last post, so let's see where the company stands today.
Current Price: $48.27
P/E on '12 earnings: 31.34
Growth expected: 28.80%
Granted, the stock is not a screaming buy with a PEG of 1.09, but consider for a minute that many companies with expected growth of near 28%, sell for much higher multiples. OpenTable recently reported earnings that give us insight into what the company has been up to.
Including the most recent release, the company has beaten earnings estimates in 3 of the last 4 quarters. The average amount the company beat estimates by was 16.8%. Annual estimates for 2012 have risen in the last 90 days, from $1.49 to $1.54. Estimates for 2013 have also been raised, from $1.99 to $2.00. Those are not huge raises, but in a difficult economic environment, any increase in estimates is worth noting. One issue I've heard mentioned, is as the company expands they are expected to have to cut prices to compete. I hope the fact that their 4th quarter net margin, was 210 basis points better than prior year, somewhat lays this issue to rest.
The most important part of OpenTable's business, is the number of restaurants signed up for their service. The more restaurants, the more diners can be seated, and the greater the positive network effect. On that count, OpenTable grew its installed restaurant base to 25,119, which was up 25% from the prior year. I don't believe that restaurants continue to sign up for a service that doesn't offer value. The fact that over 25,000 restaurants use OpenTable, speaks volumes about their business.
I like to see confidence from companies in the value of their shares. OpenTable shows this confidence by the fact that in early January, they repurchased over 1 million shares at an average price of $37.91 per share. This helps to put a floor under the share price, and shows the company believes in its future growth. I'm aware that the company issued cautious guidance for 2012, but this isn't the first time the company has guided lower. OpenTable's business is predicated on customers going out to eat at their restaurants. By virtue of signing up 25% more restaurants there is at least a 25% greater chance of OpenTable increasing their earnings.
With a balance sheet showing no long term debt, and about $79 million in cash and investments, the company is in no danger with debt. I would also point out, that OpenTable has grown the cash and investments portion of their balance sheet by 87% in the last 4 quarters.
Higher than expected earnings are the norm, nearly 29% growth expected going forward, huge cash growth, and short the stock? Which one of these things doesn't belong? The only competitor to OpenTable I've heard mentioned is Eveve. While Eveve is making a U. S. push, they still lack the critical mass that OpenTable has reached. Also, call me a simpleton if you want, but if I type in OpenTable on a Google search, I get OpenTable's web site where I can reserve a table. If I type in Eveve, I get the corporate page that gives information to prospective restaurant owners about the service. I'm sorry, but most people haven't heard of Eveve. If they hear about the company, and go to the web site, shouldn't the company have a link to make reservations? I have a long term CAPSCall that OpenTable will outperform the market. I know it's down from when I called it, but I'm a long term investor and I'm not concerned. Let me know what you think in the comments section below.
Motley Fool newsletter services recommend OpenTable. The Motley Fool has the following options: long APR 2012 $30.00 puts on OpenTable. MHenage owns shares of OpenTable and a MAR 2012 $52.50 call option. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.