Hedge Funds Short Neopost SA (NEO.PA) ~ market folly

Thursday, March 8, 2012

Hedge Funds Short Neopost SA (NEO.PA)

Market Folly's coverage has expanded into tracking hedge fund positions in UK markets as well as in French markets. Upon digging in the latter's regulatory system, it's clear that four prominent hedge funds have been short Neopost SA traded on Euronext Paris (NEO.PA).

Hedge Funds Short Neopost

Steve Mandel's Lone Pine Capital has been short shares in its Lone Balsam, Lone Sequoia, Lone Spruce, and Lone Cypress investment vehicles. They crossed the threshold that required regulatory disclosure on January 11th, 2012 and revealed a net short position of -0.508% of Neopost's shares.

Cliff Asness' AQR Capital has disclosed a -0.995% short position in Neopost due to crossing the regulatory threshold on March 2nd, 2012. They've shorted it in various funds including their absolute return master account, multi-strategy fund, relative value fund and more. They've been short for a few months and this is a slight decrease in their position as they disclosed a -1.088% short on January 31st, 2012.

Ricky Sandler's Eminence Capital has disclosed a -0.895% short in Neopost due to crossing the threshold on January 3rd, 2012. They've also been short shares as far back as August 2011 when they were short 1.32% of the company's shares. Eminence's position has slowly decreased over the past eight months, though they still maintain a position.

Alan Fournier's Pennant Capital revealed their short position due to activity on October 19th, 2011 where they were short -0.72% of shares. A month prior in September, they were only short -0.5%.

The main takeaway here is that it's highly likely that most still maintain short positions in Neopost given that they have not filed disclosures indicating they've gone below the -0.5% short position threshold (they're required to file then).

Rationale For Shorting Neopost

The thesis behind shorting Neopost is largely a secular decline story. Many hedge funds have invested under the broad theme of transformation from print to digital. They go long the companies pioneering technology and short the companies whose products are in decline (and in some cases heading toward obsolescence).

The decline in traditional postal mail somewhat falls under this theme as fewer pages/documents are printed and mailed, instead being stored and transferred digitally.

U.S. First Class mail has seen a decline in volume of over 5% annually over the past four years. Not to mention, it's been in the news that the US Postal Service was potentially facing bankruptcy.

Per Google Finance, Neopost is "a France-based company engaged in the provision of solutions for the mailing and logistics sectors. The Company rents, leases and markets mailing equipment, document and logistics systems, and supplies customized mail processing solutions for letters and parcels to a range of customers in the corporate sector."

Neopost is the second largest provider of postage meters in the US, behind only Pitney Bowes (PBI). Given that physical mail is in secular decline, it should come as no surprise that some hedge funds in the past have disclosed put positions on PBI in their 13F filings with the SEC as well.

Neopost is going after PBI's business by releasing a lower-end postage meter for the US market. Competition in the industry as a whole is heating up as Stamps.com (STMP) offers e-postage as well.

Hedgies are willing to pay Neopost's 3.7% dividend (shorts must pay the dividend normally received by longs) because they believe gains from the decline in share price will more than outweigh these carrying costs. Shares of Neopost have largely traded in a range between €48-58 over the past six months (NEO.PA currently trades at €51.xx).

In summary, it seems hedge funds are betting against Neopost largely as a way to play the secular decline in physical mail.

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