The Short Report

This story features DOWNER EDI LIMITED, and other companies. For more info SHARE ANALYSIS: DOW

Guide:

The Short Report draws upon data provided by the Australian Securities & Investment Commission (ASIC) to highlight significant weekly moves in short positions registered on stocks listed on the Australian Securities Exchange (ASX). Short positions in exchange-traded funds (ETF) and non-ordinary shares are not included. Short positions below 5% are not included in the table below but may be noted in the accompanying text if deemed significant.

Please take note of the Important Information provided at the end of this report. Percentage amounts in this report refer to percentage of ordinary shares on issue.

Stock codes highlighted in green have seen their short positions reduce in the week by an amount sufficient to move them into a lower percentage bracket. Stocks highlighted in red have seen their short positions increase in the week by an amount sufficient to move them into a higher percentage bracket. Moves in excess of one percentage point or more are discussed in the Movers & Shakers report below.

Summary:

Week ending March 23, 2017

Last week saw the ASX200 suffer a bit of a Trump Dump in line with Wall Street, as the passage of the president’s proposed healthcare bill seemed destined to failure. Despite ultimately failing, the local market had already begun recovering last week before this week racing to a new recent high.

With a lot going on in the local market at the micro level recently, there was quite a lot of significant movement in shorts last week.

Last week saw Downer EDI ((DOW)) launch its unpopular takeover of Spotless Group ((SPO)). Despite the subsequent surge in the Spotless share price, shorts in the stock rose to 6.5% from 5.0%. Shorts in Downer rose to 8.6% from 7.7%.

It has now been revealed Solomon Lew’s Premier Investments ((PMV)) was indeed behind the purchase of a 10% stake in Myer ((MYR)) last week. Myer shorts have fallen to 14.7% from 15.7%.

Shareholders of Quintis ((QIN)), formerly TFS Corp (TFC), have suffered a rollercoaster ride lately, mostly downward. Quintis shorts fell to 12.1% from 14.3% last week.

Harvey Norman ((HVN)) shorts have jumped from under 5% to 7.4%.

Beadell Resources ((BDR)) shorts have jumped from under 5% to 6.6%.

Orocobre ((ORE)) shorts have jumped to 19.1% from 17.5%, taking the stock to number one most shorted at the sort of dizzy heights once reserved for the likes of Myer and Metcash. Western Areas ((WSA)) shorts have risen to 18.8% for second place, up from 16.8%. Independence Group ((IGO)) has also crept back into the 10% plus club.

By contrast, Monadelphous ((MND)) shorts have fallen to 7.1% from 9.6%.

Rio Tinto ((RIO)) shorts have fallen to 5.4% from 7.2%.

Weekly short positions as a percentage of market cap:

10%+

ORE    19.1
WSA   18.8
ACX   17.6
MYR   14.5
SYR    13.9
QIN     12.1
VOC   11.6
NEC    10.8
DMP   10.6
MTS    10.3
IGO     10.0

In: IGO           Out: ISD                    

9.0-9.9%

ISD, MYX, OFX
 
In: ISD, OFX             Out: IGO, MND                                            

8.0-8.9%

ILU, DOW, NWS, FLT, PRU

In: DOW, NWS                      Out: OFX, GTY, BAL, SRX

7.0-7.9%

GTY, BAL, RWC, HVN, NXT, MND, A2M

In: MND, GTY, BAL, HVN              Out: DOW, NWS, AWC, AAD, RIO, MTR

6.0-6.9%

IPD, EHE, CSV, BDR, MTR, SPO, BGA, AAD, HSO, SGH, IFL, PDN, KAR, RFG, GXL, MYO, MSB, IVC, BEN

In: MTR, AAD, BDR, SPO, KAR, RFG, GXL, MYO, MSB                     

Out: WOR, SEK

5.0-5.9%

CTD, SEK, AAC, SRX, WOR, RIO, AWC, OSH, BKL, AWE, CSR, LNG, JHC, SUL

In: SRX, RIO, AWC, SEK, WOR, SUL                  

Out: MSB, MYO, GXL, KAR, RFG, SPO

Movers and Shakers

The back-stories of lithium miner Orocobre, nickel miners Western Areas and Independence Group and resource sector services provider Monadelphous have been well covered in recent editions of this Report, so I won’t go over old ground today.

Spotless is an interesting one, as we would have expected short-covering rather than an increase following the Downer EDI takeover bid. It may just be a case of the timing of reporting positions to ASIC. We’ll keep an eye out next week.

The Myer story is more straightforward. Having previously denied any interest in revisiting his old company, Solomon Lew continued to remain coy last week when it was suspected he was behind a 10% stake taken in the stock. Only this week has it been revealed that everyone was right in their assumption – Premier Investments was indeed the buyer. It is still unknown whether the stake is a precursor to a full bid, but that remains the market’s assumption.

Short-covering in Myer is thus evident.

Sticking with retail, aside from a lot of talk about “parasite”, to use Gerry Harvey’s word, Amazon moving into Australia and signalling the death of incumbent retailers, Harvey Norman is also now under investigation from ASIC, which the company initially denied, supposedly regarding accounting practices, although the company has denied that too. Either way, Harvey Norman has suddenly leapt from oblivion into the 7% shorted bracket.

Rio Tinto has fallen from the 7% bracket into the 5% bracket. This may be a capitulation following recent iron ore price-related strong gains but it could also be a simple reversal of the often popular pairs trade with rival BHP Billiton ((BHP)).

Last month’s earnings report from gold miner Beadell Resources was a poor one, featuring problems with the sulphide/oxide mix. Beadell’s share price has nevertheless risen alongside peers in the latest gold price rally. Over the course of the month, two of the three FNArena database brokers covering Beadell have downgraded to Hold, with the other on Sell. It appears the shorters have also taken interest.

It can’t be much fun being a Quintis shareholder at present. A plunge in share price last week and a bounce-back to some degree has followed accusations that the company is everything from a “Ponzi scheme” to a takeover target. Who to believe? Either way is appears some short profits were taken last week on the initial plunge.
 

ASX20 Short Positions (%)

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

IMPORTANT INFORMATION ABOUT THIS REPORT

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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