Morrisons shares top the FTSE on half year earnings and low expectations

Shares in Morrisons jumped straight to the top of the FTSE 100 today after the supermarket chain reported a 10% drop in first-half profits to £401m compared to £445m a year ago.

The profit figure was slightly worse than most analyst expectations who had predicted a drop of around 8% in profits.

On the other hand, the pace of declining sales slowed somewhat to -1.6% in the last quarter compared to a fall of 1.8% in the prior quarter, whilst turnover remained unchanged at £8.9bn.

So why has the stock rallied?

Morrisons numbers were far from stellar and yet we have the stock rallying to the top of the FTSE 100 and in fact to levels not seen since for 18 months. Why? This is a simple case of short covering.

Short covering is when short sellers – investors who have borrowed the stock to bet on falling share prices – have bought the shares back to close their short sell positions. This action has pushed share prices higher.

According to Markit data, shares in Morrisons have been the tenth most shorted stock on the FTSE 100 whilst 20% of the stock available for loan has been utilised to short sell. This leaves share prices liable to sharp jumps as short sellers cover their positions by buying back.

Brightening guidance and low expectations

The figures reported by Morrisons could have also been much worse and so this is very much a story of low expectations helping investors to react overly positively to results that don’t necessarily eradicate any of the longer term concerns. There remain significant issues surrounding Morrisons ability to re-gain lost market share to rivals that are much more advanced in the online and convenience store space.

Despite these concerns, forward looking statements by the supermarket was largely positive with the company expecting second half trading to pick up and this also helped brighten investor prospects somewhat.

Share price trends

Shares have rallied 22.5% since the lows reached on 24 July 2013 to today’s high. When compared to sector peers these gains are impressive. For the same period Sainsbury and Tesco shares have both rallied 15% respectively. However, traders who are long the stock need to be mindful of the fact that short covering is typically short term in nature and shares have – so far today at least – failed to build above resistance levels of 310p.

Moreover, shares now reside at the top of its long term sideways trading range of between 255p and 310p. Should shares prices start to tumble on profit taking this could entice short sellers to re-emerge and force a price correction.