article 3 months old

The Short Report

FYI | Sep 05 2012

By Andrew Nelson

Significant increases in short positions outweighed significant decreases for the week to 29 August, while the total number of short position increases also outpaced decreases. A total of 3 stocks experienced a short position increase of more than 1% over the period, while only one stock enjoyed a decrease greater than 1%.

Allied Gold ((ALD)) finds itself on top of the weekly short increase leader board this week, with total shorts increasing by 1.9 percentage points from 0.91% to 2.81% over the course of the week. Shareholders approved the merger with St Barbara Mines ((SBM)) a few weeks back and High Court approval followed on August 29th.

No prizes for guessing who’s next on the short increase list. Shorts in St Barbara increased by 1.83 percentage points from 1.77% to 3.60% over the period. The stock is Neutrally regarded by brokers in the FNArena database, with a Buy, Hold and Sell call recorded. The company’s in-line FY result was reviewed by all three brokers on the 24th, with Macquarie skeptical about the risk/reward profile of the merger.

JB Hi-Fi ((JBH)) increased its lead at the number one position on the leader board, with short positions rising 1.36 percentage points from 18.91% to 20.27% over the course of the weekly period. Broker’s reviewed the company’s broadly in-line FY report on the 14th of August, although a good number remain skeptical about the prospects for earnings improvement. The stock is negatively regarded by brokers in the FNArena database, with 2 Buys, 3 Neutrals and 3 Sell calls.

As mentioned, only one stock enjoyed a 1%+ decrease in short positions over the weekly period. Shorts in Australian Infrastructure ((AIX)) pulled back 1.26 percentage points from 3.05% to 2.17%. The FY result posted during the period was viewed positively for the most part, although news that AIX had received a $2bn offer from the Future Fund for all of the group's assets saw both JP Morgan and UBS downgrade the stock to Sell and Neutral respectively on the basis of a good offer price.

Regular Top 10 inclusion Cochlear ((COH)) booked a slightly less significant decrease in its short position over the period. Shorts in the stock pulled back by 0.68 percentage points from 10.61% to 9.93% despite no news or broker commentary over the period. The stock remains negatively reviewed by brokers in the FNArena database, with 4 Neutrals and 4 Sells.

The weekly Top 20 list was little changed, with one stock leaving the list and one stock joining. SingTel ((SGT)) came off the Top 20, giving its number 18 position to Specialty Fashion ((SFH)).

Discretionary retail plays continued to dominate the top 20 most shorted list, with investors and brokers remaining concerned about the uncertain consumer outlook. Significant short positions were maintained by JB Hi-Fi, Flight Centre ((FLT)), The Reject Shop ((TRS)), Harvey Norman ((HVN)) and Myer ((MYR)), which all remain in the top 10.

With the slowdown in China continuing to stifle commodity prices, short sellers also continue to focus on resources and resources services stocks.  Lynas ((LYC)) and Iluka ((ILU)) remain in the Top 10, while numbers 11-20 are dominated by resource plays of various description.

Looking at month on month numbers, stocks on the increase and decrease were fairly well balanced, although the magnitude of the decreases were somewhat more significant than the increases. Fifteen stocks saw short position improve by more than 1 percentage point, while sixteen increased by more than 1 percentage points.

Positively regarded Seven West Media ((SWM)) booked the biggest monthly improvement, with its overall short position dropping 3.61 percentage points from 5.34% to just 1.73%. The move is mostly likely due to a well received FY effort put out over the period.

RBS thinks the stock is cheap on a FY13 PER of 7.3x and especially given a dividend yield of 7.5%. The broker notes TV earnings remain solid and it believes the company should easily be able to maintain a 39-40% market share, with earnings upside possible if Seven can take greater advantage of Ten’s ((TEN)) fall in the ratings.

Myer also featured prominently on the monthly decliners list, with shorts positions coming off 2.75 percentage points from 9.98% shorted down to 7.23%. The stock is Neutrally regarded by brokers in the FNArena universe.

Not to be left out, fellow retailer The Reject Shop also posted a solid monthly improvement, with shorts slipping 2.33 percentage points from 10.2% to 7.87% shorted. Credit Suisse upgraded the stock to Neutral over the period post a fairly well received FY report.

The biggest monthly increase in overall short position was booked by Silver Lake Resources ((SLR)). Opinions remained mixed on the Integra ((IGR)) acquisition leading into the company’s FY result, which occurred just after the weekly period we are reviewing. JP Morgan thought said FY result was solid.

Whitehaven Coal ((WHC)) also saw a significant increase in its overall short position, which was up 2.96 percentage points from 1.2% to 4.16%. The company booked an in-line FY profit result over the period, but investors were likely troubled by news that Nathan Tinkler had withdrawn its takeover offer. The stock still rates all Buys in the FNArena database.

Looking at the week to 3 September, analysts from RBS note short positioning across the market has reached a record high average of 2.4%. Small to mid-cap resource stocks like Fortescue ((FMG)), Alumina ((AWC)) and Kingsgate Consolidated ((KCN)) led the way, with short positions sitting at 7.2%, 9% and 4.8% respectively. The broker also points out that short position in gold and iron ore stocks have doubled in the past six months.

Top 20 Largest Short Positions

Rank Symbol Short Position Total Product %Short
1 JBH 20579042 98850643 20.82
2 FLT 13272368 100055135 13.27
3 FXJ 264192329 2351955725 11.23
4 TRS 2906225 26092220 11.14
5 LYC 190207424 1715029131 11.09
6 MYR 59546708 583384551 10.21
7 COH 5710860 56972605 10.02
8 ILU 40451260 418700517 9.66
9 HVN 98496106 1062316784 9.27
10 DJS 48870611 528655600 9.24
11 CSR 45665370 506000315 9.02
12 LNC 44180651 504487631 8.76
13 AWC 212078319 2440196187 8.69
14 CRZ 19132975 233689223 8.19
15 WTF 17067127 211736244 8.06
16 PDN 63616539 835645290 7.61
17 FMG 226135686 3113798659 7.26
18 SFY 401384 6123605 6.55
19 MSB 18533201 284478361 6.51
20 GNS 55105305 848401559 6.50

To see the full Short Report, please go to this link


The above information is sourced from daily reports published by the Australian Investment & Securities Commission (ASIC) and is provided by FNArena unqualified as a service to subscribers. FNArena would like to make it very clear that immediate assumptions cannot be drawn from the numbers alone.

It is wrong to assume that short percentages published by ASIC simply imply negative market positions held by fund managers or others looking to profit from a fall in respective share prices. While all or part of certain short percentages may indeed imply such, there are also a myriad of other reasons why a short position might be held which does not render that position “naked” given offsetting positions held elsewhere. Whatever balance of percentages truly is a “short” position would suggest there are negative views on a stock held by some in the market and also would suggest that were the news flow on that stock to turn suddenly positive, “short covering” may spark a short, sharp rally in that share price. However short positions held as an offset against another position may prove merely benign.

Often large short positions can be attributable to a listed hybrid security on the same stock where traders look to “strip out” the option value of the hybrid with offsetting listed option and stock positions. Short positions may form part of a short stock portfolio offsetting a long share price index (SPI) futures portfolio – a popular trade which seeks to exploit windows of opportunity when the SPI price trades at an overextended discount to fair value. Short positions may be held as a hedge by a broking house providing dividend reinvestment plan (DRP) underwriting services or other similar services. Short positions will occasionally need to be adopted by market makers in listed equity exchange traded fund products (EFT). All of the above are just some of the reasons why a short position may be held in a stock but can be considered benign in share price direction terms due to offsets.

Market makers in stock and stock index options will also hedge their portfolios using short positions where necessary. These delta hedges often form the other side of a client's long stock-long put option protection trade, or perhaps long stock-short call option (“buy-write”) position. In a clear example of how published short percentages can be misleading, an options market maker may hold a short position below the implied delta hedge level and that actually implies a “long” position in that stock.

Another popular trading strategy is that of “pairs trading” in which one stock is held short against a long position in another stock. Such positions look to exploit perceived imbalances in the valuations of two stocks and imply a “net neutral” market position.

Aside from all the above reasons as to why it would be a potential misconception to draw simply conclusions on short percentages, there are even wider issues to consider. ASIC itself will admit that short position data is not an exact science given the onus on market participants to declare to their broker when positions truly are “short”. Without any suggestion of deceit, there are always participants who are ignorant of the regulations. Discrepancies can also arise when short positions are held by a large investment banking operation offering multiple stock market services as well as proprietary trading activities. Such activity can introduce the possibility of either non-counting or double-counting when custodians are involved and beneficial ownership issues become unclear.

Finally, a simple fact is that the Australian Securities Exchange also keeps its own register of short positions. The figures provided by ASIC and by the ASX at any point do not necessarily correlate.

FNArena has offered this qualified explanation of the vagaries of short stock positions as a warning to subscribers not to jump to any conclusions or to make investment decisions based solely on these unqualified numbers. FNArena strongly suggests investors seek advice from their stock broker or financial adviser before acting upon any of the information provided herein.

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