Blackfriar: In short, Provident left speculators with a bloody nose

The Bradford-based group’s shares jumped eight per cent on the news, a rise of 86p to 1115p, leaving the industry pundits who bet Provident would come a cropper in the current downturn nursing their wounds.

Short-sellers borrow stock and sell it in the anticipation that the price will fall, allowing them to buy the shares back more cheaply later.

It’s a practice that has come in for much criticism and some have accused it of adding to the woes during the height of the financial crisis.

But yesterday Provident was able to laugh off its short sellers, who have ended up looking foolish to say the least.

“Those guys have lost a lot of money,” Provident chief executive Peter Crook said yesterday.

The home credit lender is one of the most heavily shorted stocks in the FTSE index.

According to Data Explorers the short interest in the company’s shares is close to 15 per cent, an incredibly high level bearing in mind the company’s stellar performance over the past 18 months.

Richard Curr, head of dealing at Prime Markets, believes that in the current climate where banks and financial institutions are so reluctant to lend money, Provident is enjoying a mini boom.

Its specialist lending division is able to provide simple and manageable financial solutions for people “whose needs are not always met on the high street”.

Prime Markets believes the markets will cotton on to this hidden growth potential, and it expects a significant upward revaluation of the group’s shares in the coming weeks. Mr Curr has an initial two to four week target share price of 1,200p.

This is a bloody nose for the short sellers who believed Provident would be hit by Government cutbacks.

They should have done their homework.

Provident has been largely unaffected by welfare cuts as most of its customers do not claim benefits.

“Families claiming some sort of welfare benefit represent a minority of the people we serve,” said Mr Crook yesterday.

Provident is only taking on one in five new customers who approach it for a loan. With the demise of Batley-based Cattles, it can afford to pick and choose.

With a strong and experienced management team it is one of the few financial institutions to be riding high in the current tough economic climate.

POSH sausage company Cranswick this week admitted what Blackfriar has long suspected: it is not immune from the toughest retail climate for decades.

Surging pork prices and tough consumer sentiment caught up with the Hull-based group, as it issued a profits warning to send its shares diving 15 per cent.

With its main raw material, increasing 15 per cent over just three months, from about 135p per kilo to about 154p per kilo, it not hard to see why chairman Martin Davey described the current spell as the toughest he’s faced.

“We’ve experienced increases of that scale in times gone by,” said Davey.

“The difference between then and now is the economic climate that we’re all in: where the consumer has far less disposable income on account of the increase in the cost of living, be it fuel, heating or cars.

“It’s quite unusual dynamics. It has been a difficult period for processors, pig producers, retailers and the consumer.”

Figures from the Office for National Statistics showed food volumes slumped in June 4.2 per cent on the previous year, the biggest fall since records began in 1988. The cash-strapped consumer is buying less and wasting less.

These various factors have combined to create a toxic cocktail for Cranswick. Lying just below retailers in the supply sandwich, its margins are being squeezed from above by the supermarkets refusing to accept hefty price rises, and from below by pig farmers insisting on being paid a sustainable price for their pork.

Cranswick is trapped in the middle. The bacon boys of East Yorkshire insist they warned the City in March and May that this was around the corner, and the profits warning simply reflects their fears coming true.

“It’s everything we said it would be,” said Mr Davey. “The City normally reacts in a quite volatile manner.”

Its shares are now down 27 per cent over the year, and value the £758m turnover company at £309m.

But Blackfriar is not heaping blame on Cranswick. He agrees with analysts who describe its management team as “experienced, talented and conservative”. It is a solid company in terrible markets.

Blackfriar’s only surprise is that it took Cranswick so long to admit it.