Investors in Danish jewelry company Pandora A/S (OTC:PANDY) have enjoyed a bit of relief in the past month with shares up over 11%. That's the good news. The bad news is that shares are still down over 24% year to date. Like its competition, the company has been the victim of declining mall traffic and the ongoing struggles of brick-and-mortar retailers.
The odd thing is that Pandora's results have been rather strong. In the past quarter, the company grew revenue 13% (16% in local currency), as robust growth in both Europe and Asia made up for underperformance in the U.S. So what gives?
Hedge funds gang up
Part of the pressure on this stock -- or perhaps, more than part -- comes from increased short interest from hedge funds. In fact, the short interest in Pandora has increased from 1% to almost 13% recently. Five large hedge funds -- Coatue Management, AQR Capital Management, Maverick Capital, Lone Pine Capital and Third Point -- all put on short positions this year.
According to Bloomberg, these funds were focused on the weakness in U.S. mall traffic. While that actually happened, with "Americas" revenue declining 1% for the nine months ended Sept. 30, the company's 35% growth in Asia and 13% growth in Europe (in local currency) offset those declines, allowing the company to grow a 12% gain overall for the first nine months of the year.
However, Maverick Capital and AQR Capital recently revealed that they had cut their short positions, with Maverick reducing its position from about 1.31% of Pandora shares to 0.86% of shares. That news sent shares back up over 620 DKK, though short interest still remains high.
Some think that Pandora's fortunes could be turning a corner. In fact, the 18 analyst price targets on the stock range from 650 to 1200 Danish Kroner, all of which are above the current 622 DKK stock price. If judged by its average analyst price target, Pandora is the second most undervalued stock in Europe.
Turning a corner?
While much of the hedge fund pessimism has been focused on the United States, that region only accounted for 21.5% of total revenue last quarter. Despite these challenges, the company is outperforming the broader apparel industry, and it still has strong momentum in Europe, China, and India, a market Pandora only just entered. If the company can continue to grow in these other regions, the U.S. will become a smaller percentage of overall revenue, and the slowdown here will only matter less. That would make the stock a bargain at only 11.5x earnings.
The next update will occur during Capital Markets Day on Jan. 16, when the company will preview its fourth quarter and full-year 2017 results. For value investors, Pandora remains a name to watch in 2018.