In this article, we look at the 10 Worst Middle East and Africa Stocks To Buy According to Short Sellers.
Moderate Growth Amidst Challenges
According to the IMF’s Middle East and North Africa Economic Update from April 2024, the MENA region is expected to see moderate growth of 2.7% in 2024, up from 1.9% in 2023. Both oil-importing and oil-exporting countries in the region are projected to grow at similar rates, with the gap between the Gulf Cooperation Council (GCC) economies and developing oil importers (excluding Egypt) expected to be around 1%. The region’s GDP per capita is forecasted to increase by only 1.3% in 2024, primarily driven by the GCC nations. However, ongoing conflicts continue to weigh on the region’s economic activity, especially in Palestine. Gaza’s economy, for instance, saw an 86% decline in Q4 2023 compared to the same period in 2022. Trade disruptions, notably through the Suez Canal, have also affected regional and global commerce.
Over the last decade, many MENA economies have faced rising debt-to-GDP ratios, particularly among oil-importing countries, which struggle to reduce these ratios due to high oil prices. The inability to lower debt through inflation, exacerbated by exchange rate fluctuations and off-budget factors (stock-flow adjustments), underscores the need for greater debt transparency. In contrast, oil-exporting nations tend to see smaller increases in debt-to-GDP ratios during periods of high GDP growth, and in some cases, a decrease.
Meanwhile, private equity (PE) and venture capital (VC) investments have gained momentum in the Middle East and Africa, reflecting a shift in investment trends. Data from Preqin and the Dubai International Financial Centre (DIFC) reveals that about 65% of regional investors plan to maintain or increase their exposure to private equity in 2024, with 56% expressing similar interest in venture capital.
Despite the challenges posed by geopolitical tensions, venture capital continues to play a crucial role in the region’s investment landscape. Investors remain optimistic, with many reporting that their PE and VC investments have met or exceeded expectations. Key sectors attracting interest include fintech, technology, healthcare, and infrastructure.
As the region navigates the complexities of economic growth, debt management, and investment trends, it’s clear that there are both challenges and opportunities on the horizon. Investors remain optimistic about the region’s potential, however, it’s essential for policymakers to prioritize debt transparency, economic diversification, and infrastructure development to unlock the full potential of the MENA region’s economies. With that in context, let’s take a look at the 10 worst Middle East and Africa stocks to buy according to short sellers.
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Our Methodology
For this article, we used a Finviz stock screener to find 20 large companies in the Middle East and Africa, by market cap. From that list, we shortlisted companies that have the highest percentage of shares outstanding that were sold short. The list is sorted in ascending order of their short interest. We also mentioned the hedge fund sentiment around each stock.
Why do we care about what hedge funds do? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
10 Worst Middle East and Africa Stocks To Buy According to Short Sellers
10. Yalla (NYSE:YALA)
Short Interest as % of Shares Outstanding: 0.34%
Number of Hedge Fund Investors in Q2 2024: 4
Yalla (NYSE:YALA) is headquartered in the UAE and operates a popular social media and gaming platform primarily serving the Middle East and North Africa (MENA) region. Its platform, Yalla, offers voice chat rooms and online games, making it a favorite among younger users. Since its launch in 2018, Yalla (NYSE:YALA) has rapidly grown to become a significant player in the region’s digital space, with revenues reaching around $319 million by the end of 2023, logging a compound annual growth rate (CAGR) of approximately 50%. The company has consistently maintained strong operating profit margins, averaging 25% over the last five years, and has built a net cash position exceeding $500 million.
In Q2 2024, Yalla (NYSE:YALA) reported revenue of $81.2 million, a 2.5% year-over-year increase, driven by a growing user base and enhanced monetization strategies. Average Revenue Per User (ARPU) jumped from $5.8 to $6.6 compared to the previous year. The company also effectively managed costs, reducing expenses by 6.8% to $51.6 million while keeping the cost of revenues stable at 35.7%. Selling and marketing expenses fell by 31.4% due to a more disciplined advertising approach, and general and administrative expenses decreased by 5.5%. Operating income surged by 23.8% to $29.6 million. Additionally, Yalla (NYSE:YALA) benefited from a rise in interest income, which reached $7.1 million due to higher interest rates on bank deposits. Despite an increase in income tax expenses following the UAE’s Corporate Tax Law implementation, Yalla’s (NYSE:YALA) net income rose by 10.9% to $31.4 million, showcasing strong financial performance with robust revenue growth, cost management, and profitability.
During its Q2 earnings call, Yalla’s (NYSE:YALA) management expressed optimism about the company’s outlook. They highlighted stable performances from their flagship apps, Yalla and Yalla Ludo and anticipate that Q3 results will outperform Q2. The company continues to enhance operating efficiency, exemplified by Yalla Ludo’s organization of offline tournaments across multiple MENA cities, boosting brand presence and market penetration. Looking ahead to the remainder of 2024, Yalla (NYSE:YALA) expects to sustain its solid performance, with a focus on efficiency improvements. In terms of new products, Yalla (NYSE:YALA) is investing more resources into developing mid-core games, with three currently in the pipeline, set for testing by year-end before broader promotions based on user feedback.
The MENA social media market is expected to grow from $41 billion in 2024 to $59 billion by 2029. However, competition from global giants like Meta, TikTok, Snapchat, and LinkedIn poses a challenge to Yalla’s (NYSE:YALA) growth. The company is actively exploring new monetization strategies, such as premium membership models and advertising, to drive revenue. Yalla’s (NYSE:YALA) large and expanding user base also offers significant opportunities for advertisers targeting the MENA region. Additionally, Yalla (NYSE:YALA) is exploring international markets like South America, though the MENA region remains its primary focus due to its competitive advantages there. The company has also committed to share repurchases and is open to new initiatives aligned with its core businesses and MENA culture.
Yalla (NYSE:YALA) has the potential to forge strategic partnerships with telecom operators, media firms, and digital platforms within the MENA region. Such alliances could enhance distribution, boost user acquisition, and lead to co-branded offerings. Yalla’s (NYSE:YALA) deep understanding of the cultural and linguistic preferences in the MENA region gives it a competitive edge, as its platforms are tailored to local tastes. With its leadership in the MENA market, strong financials, diverse product offerings, and focus on cultural adaptation, Yalla is well-positioned for continued growth. Its expanding monetization opportunities and potential for strategic partnerships make it an attractive investment for those looking to capitalize on the digital transformation of the MENA region.
Currently, Yalla (NYSE:YALA) is trading at 5.71 times its earnings, a 57.56% discount compared to the sector median of 13.46. While 0.34% of the company’s shares are shorted, 4 hedge funds held stakes in Yalla (NYSE:YALA) in the second quarter totaling $4.12 million. Renaissance Technologies is the largest shareholder, holding a $2.16 million stake as of June 30. Analysts maintain a consensus Buy rating for the stock, with an average price target of $5.70, indicating a potential upside of 42.86% from its current level.
9. Gold Fields (NYSE:GFI)
Short Interest as % of Shares Outstanding: 1.02%
Number of Hedge Fund Investors in Q2 2024: 20
Gold Fields (NYSE:GFI) is a South African gold mining company with a diverse portfolio of operations in South Africa, Western Africa, Australia, Canada, and Peru.
In the first half Gold Fields (NYSE:GFI) showed a decline in production, the company produced 954,000 ounces of gold, 22.3% lower than the same period last year. Due to the low production, the company’s all-in-sustaining costs increased by 43.86% to $1,745 per ounce, a significant rise that impacted profitability. Looking ahead, the company has revised its full-year production guidance to 2 million-2.15 million ounces, a slight reduction from its previous estimate of 2.2-2.3 million ounces. Gold Fields (NYSE:GFI) first-half results were impacted by severe weather, fatalities, and reduced mining access.
However, the company expects normalization of operations to occur in the second half of the year, driven by the resumption of mining at Gruyere Gold Mine in Western Australia and improved performance at St. Ives and South Deep gold mines. Gold Fields (NYSE:GFI) expects production to increase in the second half of the year. The company anticipates a 14% half-over-half increase in production at South Deep and a 49% increase at St. Ives.
The company is also implementing cost-saving measures to mitigate the impact of higher all-in-sustaining costs and aims to reduce costs through operational efficiencies and optimization of its mining processes. As gold prices are on the rise, Gold Fields (NYSE:GFI) is well-positioned to benefit from the current market trend. While 1.02% of the company’s shares are shorted, 20 hedge funds have maintained a bullish sentiment on the stock as of the second quarter with stakes worth $174.49 million. Analysts expect the company to increase its earnings by 19.6% this year.
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