Why are Guzman Y Gomez shares being shorted?

A cute little boy, short in height, wearing glasses, old-fashioned bow tie and cardigan stands against a wall near a tape measure with his hand at the top of his head as though to measure his height.

Guzman Y Gomez Ltd (ASX: GYG) shares have been targeted by shorters after its entry onto the ASX boards. The Mexican food operator's share price opened at $30 on the first day of trading, jumping more than 30% higher than its initial public offering (IPO) price of $22.

While the GYG share price did drop to $28.80 at the start of this week, it has since climbed to around $29.40.

However, some investors think this valuation is too high. When an investor shorts a stock, it means they're betting that the stock will go down.

GYG may have large growth ambitions, with an ultra-long-term target of 1,000 restaurants in Australia and international growth intentions, but some investors have questioned whether the business should be valued as highly as it is today.

Shorters attack GYG

According to reporting by the Australian Financial Review, data from the ASX showed that approximately 1.1 million Guzman Y Gomez shares were loaned to shorters on Tuesday.

It was reportedly the largest amount of shares of any stock shorted on that day, totalling around $32.7 million.

These early figures have come ahead of official data, which will be made available by the Australian Securities and Investments Commission (ASIC) in the next few days.

The AFR reported that Bloomberg data showed at least one sizeable shareholder had been selling shares, with around $59 million of GYG shares sold in three big block trades this week.

The newspaper also reported that three fund managers were offered shares to short at a borrowing cost of between 7% and 7.5%.

Brokers then told hedge fund clients that around $50 million was expected to be made available to borrow, with strong levels of interest. The borrowing cost fees were over 10%, but those brokers expected this to reduce, according to the AFR.

One negative view of the Guzman Y Gomez share price valuation

The investment team at Forager Funds Management likes to focus on undervalued shares and avoid overhyped stocks.

On the most recent Forager podcast episode, chief investment officer Steven Johnson said:

…It's not easy to list companies at the moment, we've seen Virgin put off its float here in Australia a number of times and then this Guzman IPO comes along.

It seems like a massive, massive price for a business at the stage that it's at and not only have they got the IPO away but it popped 30% on the day of the IPO and now trades with a $3 billion market capitalisation.

So, I mean it's far too expensive for me. There's far too many things that have to go right. You cannot make the valuation stack up on Australia alone, it needs to work overseas and we know that's very difficult.

But, I've just been fascinated by the amount of, I guess, animosity towards it or jealousy towards it…it's just a stock and it's an Aussie-founded business that's got some plans to go global. I don't own it and we're not going to own it but I don't wish ill upon it and I'd be quite happy to see that business go on and be very, very successful.

GYG share price snapshot

The GYG share price is currently down by 0.3% in today's morning trade, though it's up 33% since the IPO price of $22.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.