TOKYO -- Tokyo Electric Power has been surging in heavy trading, stretching its winning streak to an eighth session Wednesday as retail investors enthusiastically snapped up shares of the embattled utility known as Tepco.
But the rally also has hedge funds salivating at a golden short-selling opportunity.
"With such exporters with good finances as Denso, Mitsubishi Heavy Industries and Hitachi finally advancing, the market is once again friendly to fundamentals-focused investors like us," said a cheerful Japanese equities officer at a U.S. hedge fund. This fund, one of the few that still has offices in Tokyo, is a long-short investor that takes long positions in undervalued stocks and short positions in overpriced issues based on corporate performance and other data.
The fund struggled until March, with stocks that it thought would rise failing to do so and those that it bet would decline climbing. But the market has returned to relative normalcy since April, the officer said, adding: "One exception, however, is Tepco."
Tepco's surge is astounding. It has soared a whopping 54% over the last month, not just beating the 4.8% increase in the Nikkei Stock Average but becoming the third-biggest gainer of the roughly 1,800 issues on the Tokyo Stock Exchange's first section.
"People are asking why in the world Tepco is skyrocketing this much," says a utilities analyst at a major securities company.
Pretty much all institutional investors in Japan dumped Tepco shares after the 2011 disaster at its Fukushima nuclear plant. Even today, its main buyers are limited to individuals.
The question is why retail investors are picking up the stock.
The main buy incentive right now is that Tepco will not be hit with large selling by institutional investors, explains Nobuyuki Fujimoto at SBI Securities. The absence of institutional shareholders provides peace of mind to individuals buying the stock, this theory goes.
It does not necessarily hold water, however.
On Tuesday, a large short-selling report for 8.15 million Tepco shares, or 0.5% of those outstanding, was submitted to the TSE by Deutsche Bank's London branch. The short sellers likely were several hedge funds that mainly work with Deutsche Bank. "The stock is now trading at a ridiculously unreasonable price, so this is a good time to short it," says the U.S. hedge fund officer in Tokyo.
Another tug-of-war between retail investors and investment funds was played out in Tokyo about a year ago over Mixi shares. That time, as if to sneer at the funds that had engaged in short selling, Mixi kept climbing, leaving the funds with massive losses.
Over the long term, stock prices ultimately are determined by the fundamentals. In Tepco's case, the question is when that will happen.