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Sanditon gambles on Just Eat investors' indigestion

Sanditon managers Chris Rice and Tim Russell are having a difficult time shorting stocks during the recent stock market rally.

Sanditon gambles on Just Eat investors' indigestion

Sanditon (SIT ) saw its gains in the second half of 2016 almost wiped out by a short-sell position against stocks its managers consider expensive. Nevertheless, the UK growth investment trust is sticking with at least one conviction position: Just Eat (JE).

The takeout ordering service has performed explosively since debuting at 100 times forecast earnings in 2014, returning 113% after rising from a flotation price of 214p to 499p.

Some of the gloss has come off that ascent this year, however, with a 12% share price fall after missing analysts' sky-high expectations for order growth in mid-December, and announcing an acquisition Sanditon managers Chris Rice and Tim Russell believe was designed to mask the slowdown in the business.

‘Just Eat cost us 1.2% in the second half as the shares rose on the back of a trading statement which to us looked like it was revealing slower growth in its key UK market,’ wrote Rice and Russell in the trust's half-year results.

‘This was confirmed to us near the year end when they announced the proposed acquisition of Hungry House, the number two takeaway app, for £200 million.

‘The deal will only bring them an extra 1,000 restaurants to add to their roster of 28,000, suggesting to us that they remain too eager to acquire growth to hide slowing organic growth. Time will tell but should growth stall due to increased competition or market saturation, we suspect the shares have a lot of downside.’

Despite the recent slide, Just Eat remains aggressively valued, at almost 89 times last year’s earnings. The median price target issued by the universe of analysts tracked by Thomson Reuters has dropped from almost 600p to 500p in the last three months.

Launched in 2014, Sanditon had a difficult 2016, turning bearish on UK valuations even as the post-Brexit vote slide in the pound sent the FTSE 100 index to a series of record highs.

Over the full year the 9.3% return made on conventional 'long' position in shares was reduced by a 3.1% loss on the short trades, in which the trust only makes money if the shares fall. This increased Sanditon's net asset value (NAV) by 5.1%, ahead of its target of achieving an absolute return over 2% more than inflation but below the 16.8% rise in the FTSE All Share.

All of the outperformance came in the first half, however, with a short book loss of 6.6% wiping out the 6.3% gain on long holdings in the last six months of the year.

The managers primarily attributed their disappointment to their scepticism on industrials.

‘We have been short industrials since the start of the company’s life which was largely beneficial to performance up to the Brexit vote,’ they wote.  

‘However, the sharp fall in sterling post the referendum vote was beneficial to most industrials who generally make a large percentage of their profits overseas and shorts in this area cost us 3% in the second half, having been a small positive in the first half.’

Shares in the £52 million trust currently trade at a 1.3% premium above NAV.

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