Shares in Premier Inn owner Whitbread (LSE:WTB) fell sharply on Monday following a report from The Sunday Telegraph which claimed that a group of hedge funds were planning on short-selling the stock.
Short-selling is a form of investing whereby individuals or funds can bet against the value of a company’s stock by borrowing shares to sell them immediately before buying them back at a lower price. They’re betting on (and profiting from) a falling share price.
According to the report, New York-based hedge fund Jane Street Global Trading is leading the charge against Whitbread, which last year sold one of its highest performing brands, Costa Coffee, to Coca-Cola for £3.9bn.
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On Monday Whitbread announced that it completed the return of £2.5bn in funds generated by the sale of Costa to its shareholders through a share buyback programme.
The shares have performed strongly since the sale last year, climbing more than 22% in the last 12 months, despite concerns being raised about the decision to offload Costa.
Time to worry?
So if I were holding Whitbread shares would I be worried? Would I be better cashing in at this stage to avoid further losses after the stock dipped as much as 4% on Monday?
I wouldn’t necessarily be rushing to sell at this stage with the stock trading at around 4,700p.
While the sale of Costa seemed strange to some, I believe it may have allowed Whitbread to put more of a focus on its Premier Inn hotel brand, where further growth has been earmarked for 2019 and beyond.
Demand for budget hotels has been on the increase and is forecast to continue to do so, and the share price has held up despite difficult economic conditions caused as a result of Brexit uncertainty.
Despite its most recent quarterly earnings showing a 6% fall in per-room revenue, earnings generally have held up and the group has begun to diversify its operations by expanding into new markets, such as Germany.
German expansion
As has been previously noted by G A Chester, the German market could represent a significant expansion and lead to substantial growth if the domestic success it has had can be replicated.
Trading on a current P/E ratio of around 29, it could be said that the shares are expensive, but the current yield of 2.1% seems set to grow in the years to come as the company looks to give back to shareholders.
An estimated 17.6% of the company’s shares are currently on loan as a result of the short-selling spearheaded by Jane Street, quite a significant bet from the hedge funds and perhaps an indicator that all is not rose for the company.
While I do think that in the short term, investors may have to ride out some uncertainty, the long-term business prospects remain strong and the level of share buybacks completed by Whitbread indicate to me that the company is in a healthy position.
A swift resolution to the chaos surrounding Brexit would certainly provide investors with a bit more clarity about where the shares are headed, but at 4,700p I’d hold the stock for its long-term growth prospects.
