Another bite at shorting Just Eat

Despite the recent fall in its share price, Just Eat is still valued at 38 times 2020 earnings. That seems optimistic, says Matthew Partridge.


Double-digit growthis a thing of the past
(Image credit: Ben Queenborough)

Takeaway group Just Eat faces tough competition and slowing growth.

It's safe to say that my suggestion to short online food delivery firm Just Eat last September didn't work out particularly well. After I made the tip, it rose in price from 660p to 735p. Eventually I decided that, as it was making a loss after six months, enough was enough and that the best thing to do was to cover your position and close the trade at a loss of £228. In retrospect, I'd have been better off saying nothing, as the price subsequently crashed by nearly 20%, to below the original level of my "short" tip, at 620p. So why am I suggesting that you short it again now?

Just Eat has been hit by two key negative pieces of news. In the last few weeks, online behemoth Amazon announced it was making a major investment in Just Eat's rival, Deliveroo. While Just Eat acts purely as a portal linking consumers with restaurants, Deliveroo actually delivers the food itself, and is even starting to dip its toes into operating its own kitchens. While each approach has advantages and disadvantages, Deliveroo could use Amazon's money, logistical expertise and delivery network (especially the Amazon Prime service) to develop its model to the point where the group has an overwhelming advantage, especially among those who want their food delivered extra rapidly.

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It's not just Amazon

But the tie-up between Amazon and Deliveroo isn't the only threat to Just Eat. When the minicab-booking app, Uber, listed on the stockmarket at the start of this month, it placed a lot of emphasis on Uber Eats, its online delivery service. With Uber under pressure to keep growing at all costs (which will only be increased by its disappointing performance after listing), it's possible that it could try to take market share from Just Eat by cutting the cost of Uber Eats. Indeed, there are already rumours that it is about to offer unlimited deliveries for a flat monthly price of £8 a month.

So the competition is growing increasingly aggressive. Which is why it's particularly concerning that growth at Just Eat also appears to finally be slowing. The company's latest quarterly earnings show that growth in the number of orders has fallen to just 7.4% year-on-year, a far cry from the double (or even triple) digit growth that it has been enjoying up until now. While the management team blamed the weather and also argued that the purchase of Hungry House distorted last year's figures, it suggests that Just Eat may be starting to reach saturation point.

Yet despite the recent fall in its share price, the company is still valued at 38 times 2020 earnings. That seems optimistic, given that it is facing both slowing growth and tougher competition. As a result, I would suggest shorting it again at the current price of 620p. Previously I suggested you go short at £3 per 1p this time I think you can be more aggressive, and increase this to £6 per 1p. Set a stop loss to cover your position if the price reaches 775p, which gives you a total downside risk of £930.

Trading techniques: the index effect

A lot of money is now invested in passive "index" funds that track a particular stock market index, such as the FTSE 100 or S&P 500 (see page 13). Despite their many advantages, one flaw is that if a stock is removed from the index they are tracking, the fund must sell it, and replace it with any stocks being added to the index. Some active funds also prevent their managers from investing in stocks outside a given index. While the index providers typically announce these changes in advance to avoid a mad rush of buying and selling, fund managers still have a very limited period in which to make the changes.

The boost that inclusion in an index provides to the price of a stock (or the negative impact of being booted from an index) is known as the "index effect". Several studies have confirmed that it not only exists but can produce significant returns. For example, a 2016 study by Cameron Scari of the University of Pennsylvania found that between 1990 and 2015, shares added to the S&P 500 returned an average of 5.64% more than the overall market between the announcement of their inclusion and when it formally took effect.

Given that this effect has been known for some time, it's no surprise that most of the excess return occurs on the day of the announcement. Still, even if you had waited until the day after the announcement before buying, you would still have made a pretty decent excess return of 1.8%. However, it's a bad idea to hold on for too long, as some evidence suggests that the market overreacts to the impact of the announcement. Indeed, Scari found that in the first 30 days after the changes took effect, newly added stocks typically lagged the market.

How my tips have fared

The last fortnight has been mixed for my seven "long" tips. Five of them have risen, with John Laing Group advancing to 387p (382p); JD Sports rising to 618p (from 611p); Hays increasing to 150p (from 146p); and Somero rising to 367p (from 365p). Superdry also rose to 480p (from 455p), while Safestore stayed steady at 643p.

However, the small gains on most of my long positions have been outweighed by the slide in housebuilder Bellway's share price, from 2,998p to 2,792p. This wiped out my profits on the trade, and cut the overall profit on my longs to £1,064.

On the short side, recently-listed Zoom's share price hasn't fallen enough yet to make it worth shorting. Pinterest did fall beneath the $25 a share level at which I suggested going short, but it has since rebounded to $25.50, so you would currently be making a loss of £100. Online estate agent Rightmove has also risen, from 549p to 559p.

The good news is that Weis Supermarkets has fallen from $40.22 to $38.46. Meanwhile, Tesla's operational and financial problems mean its share price has dropped from $231 to $190. This means that my open short tips are making a collective profit of £484.

The overall profits from the remaining short and long tips come to a total of £1,548, which is still more than the losses of £854 that I've made on the closed positions. While I won't close any positions this week, I'm going to suggest tightening some of the stop losses on my positions.

So you should increase the stop loss on John Laing Group to 350p, and raise the JD Sports stop loss to 500p. At the same time, given how far Rightmove has risen, I'm going to recommend that you cover the position if the share price goes above 580p.

Dr Matthew Partridge

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

Follow Matthew on Twitter: @DrMatthewPartri