* Aixtron, Alcatel-Lucent, Infineon among most targeted
* Technology sector funds suffer outflows -EPFR Global
* Shares of chipmakers still trading at a premium
* Risk of "short squeeze" on Nokia as Lumia goes on sale
By Blaise Robinson
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
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
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