Hedge fund short-sellers to target Wal-Mart Mexico

Sun Apr 22, 2012 7:24pm EDT

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(Reuters) - Hedge fund managers are bracing for selling pressure in shares of Wal-Mart Stores Inc on Monday, but market experts said it is the retail giant's less visible Mexican unit that could be the more attractive target for short sellers.

The New York Times reported on Saturday that Wal-Mart de Mexico, which is 69 percent owned by Wal-Mart Stories Inc, had orchestrated a widespread bribery campaign in 2005 to win market dominance. The investigative article alleged that senior Wal-Mart executives knew about the matter and tried to cover it up.

"I would not consider Wal-Mart shares expensive, but I definitely would not be a buyer at these levels in the 60s. I'm more interested in shorting the Mexico traded 'pure play,'" said private activist investor Daniel Yu, who has presciently shorted such stocks including Green Mountain Coffee Roasters Inc and Sino-Forest Sino-Forest Corp.

Wal-Mart said in a statement on Saturday that it was "deeply concerned" about the allegations in the Times report and began an investigation into its compliance with anti-bribery laws last autumn.

Analysts said Wal-Mart could be forced to devote millions of dollars and enormous amounts of manpower to the investigation, which could eventually cost some top executives their jobs.

Major institutional investors said Wal-Mart shares might face selling pressure in the near term, especially since the stock has risen about 17 percent in the past 12 months to $62.45, outperforming the S&P 500 index's 3 percent rise.

"You might find a little short-term pressure on the Wal-Mart stock, but I would not expect any long-term effect," said Kenneth Polcari, managing director at ICAP Equities in New York.

Short interest on the stock is very low. According to Data Explorers, which tracks short interest, just 0.5 percent of all shares are being borrowed for short sales, a very low figure.

John Marshall, a senior markets analyst for the United Food and Commercial Workers capital stewardship program, wonders if there will be lawsuits being brought on behalf of shareholders.

He said shareholders are going to want to know if the board was actively managing risk. "Either they were actively doing their job and fulfilling their responsibility to be managing that risk and they were lied to and the facts were being kept from them -- or they weren't. And that would be a bigger problem ... This is clearly an area of risk that the board should have been on top of."

Marshall is not a Wal-Mart shareholder, but UFCW funds own Wal-Mart shares through broad equity indexes that they participate in on behalf of more than 1 million members.

Wal-Mart de Mexico, better known as Walmex, closed on Friday at 43.06 pesos, after gaining steadily since August of last year when they were just under 30 pesos.

Walmex is due to report results on Monday. Mexico's largest retailer is expected to report a 14.1 percent increase in first-quarter profit, helped by a broad pickup in consumer spending as well as aggressive promotions that boosted sales.

Walmex has expanded rapidly since Wal-Mart opened its first store outside the United States in Mexico City in 1991, then part of a joint venture. In 2011, the Mexican unit reported total sales of 379 billion pesos ($29 billion). Walmart's fiscal 2012 sales, for the year ended January 31, were $443.85 billion.

(Additional reporting by Jessica Wohl, Editing by Tiffany Wu and Diane Craft)

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