December 20, 2018 / 2:48 AM / a year ago

Punters drawn to the convenience of Japan's FamilyMart's volatility

TOKYO, Dec 20 (Reuters) - Shares of Japan’s second largest convenience store operator FamilyMart have become a favourite with short-term traders in the domestic stock market due to the outsized influence the stock has on the benchmark Nikkei index.

FamilyMart Uny Holdings Co is the fourth biggest stock by weighting in the Nikkei share average. Yet, the number of freely floating FamilyMart shares is smaller than those of other benchmark constituents, making it a prime pick for investors and punters seeking to swing the index.

The largely domestic FamilyMart’s emergence as a favourite is recent and driven by concerns that the other heavyweights in the index, such as Fast Retailing Co, SoftBank Group Corp and Fanuc Corp can often be swayed by external factors.

Shares of FamilyMart have soared 110 percent this year and hit a record of 18,960 yen on Nov. 28, with volumes spiking to four times the daily average of 1.05 million shares for the previous 60 days.

“FamilyMart’s share price has gone too far on buying by short-term investors, such as hedge funds, who wanted the Nikkei to rise as well as retail investors who were unwinding their margin selling positions,” said Norihiro Fujito, chief investment strategist at Mitsubishi UFJ Morgan Stanley Securities.

The practice of traders using a handful of volatile, large cap stocks in order to influence the price-weighted share index is common in many markets. In Japan, it is most evident just before quarterly settlements of Nikkei’s options and futures contracts.

A company’s share price determines its proportion in the overall index. With a 2.95 percent weighting in the Nikkei, FamilyMart follows Fast Retailing’s 10.41 percent, SoftBank’s 4.33 percent and Fanuc Corp’s 2.99 percent, according to index provider Nikkei Inc.

The heavy buying has made FamilyMart shares expensive. Its shares trade at 60.56 times projected earnings, while sector peers such as Seven & I Holdings’ trade at around 21 and Lawson Inc at 25, according to Refinitiv data.

Of 14 Refinitiv analysts, 12 have sell or strong sell ratings on FamilyMart.

Mitsubishi UFJ’s Fujito said that investors would find FamilyMart shares expensive if based purely on fundamentals.

Despite the valuations, Fujito said punters are increasingly favouring domestically focused FamilyMart over SoftBank and Fanuc, which are weighed down by global events.

“SoftBank bears the brunt of price moves in its Vision Fund’s high-tech components, while Fanuc heavily relies on China’s capital expenditure plan,” Fujito said.

Both Fast Retailing and FamilyMart have a low free float of shares, which magnifies the price movement.

Only 35 percent of FamilyMart’s shares are freely floating as more than 41 percent is held by major shareholder Itochu Corp while the Bank Of Japan’s purchases of exchange-traded funds have also caused the free float to shrink.

“The lower free float a stock has, the more volatility it gets,” said Shingo Ide, chief equity strategist at NLI Research Institute. “FamilyMart was not lifted by the BOJ’s buying alone, but the BOJ’s asset-purchasing program is adding to the volatility.”

Likewise, Fast Retailing’s free float rate is 20 percent, while the Topix’s average free float is 60 percent, according to data compiled by Ide.

Editing by Vidya Ranganathan and Sam Holmes

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