Short sellers take aim at Spanish builders

PARIS (Reuters) - With Spain back in recession, shares in its construction firms are increasingly in the crosshairs of short sellers aiming to benefit from further falls, with names like ACS and FCC among the most targeted.

European builders, strongly exposed to the region's economic cycles, have had a rocky two months, stung by a surprisingly brutal slowdown in a number of European countries while fears over the region's sovereign debt crisis intensified.

The austerity drive across the euro zone has cast a shadow over the sector, with a significant number of projects halted as governments scramble to cut costs.

The STOXX construction and materials index, home of names such as French cement giant Lafarge and Irish building materials group CRH, has tumbled 15 percent since mid-March, underperforming the broad STOXX 600 index, down 9 percent over the same period.

The sector's poor outlook is now prompting some investors to bet on further losses, particularly for Spanish builders, which are still struggling with the fallout from an abrupt property crash in 2008.

"From a macro perspective, Spain will continue to suffer, and construction groups are among the top domestic plays, so the sentiment towards the sector is pretty negative," said Jerome Troin, equity trader at Louis Capital Markets, in Paris.

"Builders are stuck with loads of unsold houses, there's a destocking issue, while the European Central Bank ultra-cheap loans have been used by banks to do carry trade. It hasn't reached the real economy."

According to Data Explorers, a London-based research firm that tracks short interest in equities, Spanish names are the most heavily shorted construction stocks across Europe, with an average of 4 percent of their shares out on loan, up nearly 30 percent in the past 12 months.

Abengoa tops the list, with 13 percent of its shares out on loan, which has held steady despite a 50 percent meltdown in the stock over the past 12 months.

Investors who sell a stock short seek to profit from falling prices by borrowing shares to sell, buying them back at a lower price to return to the lender and pocketing the cash left over.

"Short sellers are no doubt targeting the solar and renewable energy portion of Abengoa's revenue, which has seen government subsidies slashed in Spain and also abroad," Data Explorers analysts wrote in a report.

Their figures show 8.9 percent and 5.7 percent of shares in ACS and FCC, which have a heavy reliance on domestic revenue, are out on loan.

Louis Capital's Troin said he has been playing a pairs trade strategy with a long position on Italian stocks and a short position on Spanish stocks, a market-neutral strategy that bets on the gap between the performance of the two assets regardless of the overall market direction.

"We're in flight-to-safety mode; investors are dumping risk, and Spanish stocks are among the most risky assets in Europe at the moment."

MORE FORECAST DOWNGRADES LOOMING

Early on Friday, FCC posted a 59 percent drop in quarterly net profit, sending its stock down 4.8 percent.

Things are turning for the worse on the country's earnings front, with more and more analysts slashing their earnings estimates as the country's economic backdrop deteriorates.

The proportion of analysts cutting their forecast for Spanish companies over the past three months versus the ones raising their forecasts - a measure known as earnings momentum - has risen by about 5 percentage points since early February, Thomson Reuters I/B/E/S data shows, bucking a positive trend in other euro zone countries such as Italy, France and Germany.

Data Explorers figures show above-average short interest in some other European builders, such as Dutch firms Imtech and Grontmij, Italy's Impregilo and Finland's Outotec and YIT.

Bucking the trend, short interest in French construction stocks remains low on the whole, data shows, as the stocks are seen as potential winners from the election of Socialist Francois Hollande as the country's next president.

Hollande has said he wants to persuade European partners to shift the economic policy priority from austerity to growth, fuelling hopes of government spending on infrastructure.

"French construction firms are set to gain from Hollande's presidency as he has promised to boost social housing and take measures to revive economic growth overall," said Agilis Gestion fund manager Arnaud Scarpaci.

(Reporting by Blaise Robinson; Editing by Will Waterman)