Directory businesses amongst most shorted stocks, yet retain institutional support

Rail commuters in the UK are privy to the latest digital billboard advertising where content is tailored to match the locality – “Heading to Southend? Try Southchurch Park Café." The ads have been created by Yell, to showcase its local business information and reviews. Faced with the onslaught of competition from every direction, commentators have been predicting the demise of these directory based businesses for years, yet they persist and still turn a profit. We look at investor sentiment in the UK’s Yell Group plc (Lon:YELL), France’s Pages Jaunnes Sa (EPA:PAJ) and Canada’s Yellow Media Inc (TSE:YLO).

Directory businesses have been around for decades, predating their new Internet rivals such as Google and Groupon. The challenge is for them to become relevant in digital media in the same way that they have owned local search in their traditional print directories. Yell’s new CEO was quoted in the Guardian explaining that Google, which dominates the online classified ads market, doesn't have "half of what we have" in the local search market and espousing the strong relationship his sales team has cultivated with local advertisers.

Yet Yell has the dubious honor of being the second most shorted stock in the FTSE All share. The company, with operations spanning Europe and the US, reported a sharp drop revenues in February and warned that full-year earnings would fall short of expectations. The FT noted the company’s attempts to calm investors with claims there were no signs of revenues falling “off a cliff” and that the decline was “manageable”. The management has been busy drawing up cost cutting plans to drive down the group’s GBP 2.8bn debt pile and reposition the business to focus on digital, which now accounts for a quarter of group sales.

Investor sentiment tells an interesting story. While the shares have fallen from 60p last April to 9p, short interest has risen from 8% to 19.4% of total shares outstanding on loan, which represents a staggering 87% of the supply of shares that are available to be borrowed. This essentially means it is virtually impossible to borrow more Yell stock even if you wanted to.

Regardless, holdings of long only funds, which make their shares available to be borrowed (Data Explorers proxy for institutional ownership), have held up over the last year. While their holdings have fluctuated between a low 320 million shares last December and a recent peak of 380 million shares in February, they remain at 367 million shares. Many of these funds are likely to be FTSE250 Index tracker funds. Should Yell’s shares continue to slide and the company falls of out the Index, it will be interesting to see the impact on long only holdings.

We see a similar picture with Canadian listed Yellow Media Inc, which is following a similar model to transform itself into a digital company to extend its reach with consumers and advertisers. The company achieved 20% of 2010 revenues from the digital side of its business and its CEO was quoted claiming to be Canada’s number one internet company. The group has been on the acquisition trail following its CAD 225 million takeover of Vancouver-based search engine and directory publisher Canpagesas, as well as bargain hunting site RedFlagDeals.com and technology shopping comparison site PriceCanada.com. It has also branched out into website builds for SMEs and the provision of email marketing and video production. The Canadian Press noted that the company’s transition to a digital business started about three years ago and is expected to take until 2012, whereupon the group forecasts a return to organic growth.

The share price has held up since November at around CAD 6, dipping slightly since February to CAD 5.29. During this time, the percentage of shares outstanding on loan has increased steadily from nothing to 13.7% of total shares outstanding on loan, which represents almost 40% of the supply of shares that are available to be borrowed. Like Yell in the UK, holdings of institutional investors who lend have remained constant at 23.2% of total shares.

Over in France, the media has reported comments from the CEO of Pages Jaunes Groupe Sa that it is the only traditional directory business to have completed its evolution into a digital media business, with the company making over half of its revenue online. Natixis rates the shares a Buy. It argues that management has been too cautious in its outlook and that revenues from the group’s mobile internet offering (which has already secured more than 50k clients) will drive growth this year.

The company reported a drop in Q4 revenue as falling advertising sales in directories more than outweighed growing Internet revenue. The shares have fallen from a peak last July of EUR 10 to just under EUR 7 today, during which time short interest has more than doubled from 5% to 11.4% of total shares outstanding on loan. The shares are heavily utilized with over three quarters of the lendable supply currently out on loan, which will take over 40 average days trading to cover. Long only investors have reduced their holdings by a fifth since October.

Nestled amongst a peer group of highly rated information publishers, the quoted directory businesses are running fast to stand still. Yet, they are undoubtedly evolving to reposition themselves in the digital age. Definitely an area to watch.

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