We reiterate our downgrade to 'Sell' on Piper Jaffray Companies (PJC) based on the price of $45; we recommend that investors close long positions and reverse to the short side near $45. We previously published our view on Seeking Alpha on June 29.
Looking at the company's most recent earning report, we recognize that it has been able to swing to a profit beating consensus, which in our opinion was set very low.
In our view, the share price of $45 completely reflects a potential future improvement in Piper Jaffray's business model, which has yet to be seen in terms of fundamentals:
- The company has gone through a downsizing period reducing costs; however, in order for Piper Jaffray to compete internationally it will have to hire at a senior level, a fact which will be important on the medium to long term and should drive costs higher;
- We think the company's renewed focus and success in fixed income is likely to moderate significantly;
- We have not seen any important revenue improvement in PJC deriving from its international operations; on the contrary, US operations remain the main contributor to their revenue in large part due to their fixed income business, which is expected to moderate significantly;
- It is a fact that equity investment banking activity remains soft and we do not foresee any important improvement short term.
Having said that, the current positive momentum in the financial sector, significant short covering and a relative low float has helped, in our opinion, to drive up the share price, limiting its upside potential at this point.
Recent data shows Piper Jaffrayshort interest is at the lowest level of the past two years. The action in share price within the past twelve months also suggests that a previous high short interest has had a very positive effect providing resilience and support for the rally, however momentum should decrease in the coming weeks.
Disclosure: short (PJC) $44.9, very limited upside seen short term $47
