The Short Report

This story features NEXTDC LIMITED, and other companies. For more info SHARE ANALYSIS: NXT

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 August 21, 2014.

Last week was the busiest in the result season amongst the larger caps and led to a lot of short position argy-bargy, both leading into, and as a consequence of, published results. A falling iron ore price meant long-standing top position holder Cochlear gave its spot up to Atlas Iron in our last report but with Acrux shorts having risen further post result, COH has now slipped to third. But the real action was in the mining services sector.

The shorters have been expecting this sector to crash and burn in results season but a spate of "in line" results is not what was anticipated. A big short swap was apparent last week as Bradken leapt up the most shorted table to change places with UGL, while Monadelphous is also back amongst the short heavyweights.

A little bit of bracket creep saw NextDC ((NXT)) replace Iluka Resources ((ILU)) in the elite 10% plus club last week while we waved goodbye from the 5% plus table altogether to IOOF Holdings and Papillon Resources, which also fluttered off, after big drops in short positions.

Weekly short positions as a percentage of market cap:

10%+

AGO   15.6
ACR    15.3
COH   15.1
MTS    13.2
MYR   12.4
JBH     11.7
NWS   11.2
PDN    10.8
TRS     10.8
BKN   10.6
NXT    10.0

In: BKN, NXT            Out: UGL, ILU

9.00-9.99%

ILU, CAB, DSH, ALQ

In: ILU, DSH             Out: NXT

8.00-8.99%

RRL, MND, MIN, WHC,

In: MND                     Out: DSH

7.00-7.99%

KAR, UGL, ASL, BLY, MSB, FMG

In: UGL          Out: BKN, MTU

6.00-6.99%

NUF, MTU, SGT, BRU, WSA

In: MTU                      Out: VET, IFL

5.00-5.99%

VET, VRT, LYC, OZL, FLT, TEN, GNC, IVC, GWA, SGM, SPL

In: VET, OZL                         Out: MND, RFG, PIR, CDD

Movers and Shakers

Short covering in Cochlear ((COH)) has continued for two weeks following the better than expected result, last week trimming shorts another 0.5ppt to 15.1%. Acrux ((ACR)) posted a disappointing earnings result last week, and its shorts subsequently rose 1.2ppt to 15.3% from 14.1%. Atlas Iron ((AGO)) shorts were also trimmed slightly last week to 15.6% ahead of this week’s profit result, which means Cochlear has now slipped into third position, with Acrux moving into second and Atlas holding on at first.

The week before last, Monadelphous ((MND)) had crashed out of the 10% plus shorted club with a big reduction in shorts to 5.7% ahead of last week’s result. The result was “in line” which was enough to send Mona shares spiking upward, but the shorters decided the company is by no means out of the subdued market woods and re-established some positions, to the tune of a 2.7ppt increase to 8.4%.

Similarly, mining services peer Bradken ((BKN)) posted an in line result, but while BKN received two broker upgrades to Buy for its troubles, Mona is stuck with nearly all Sells. Bradken’s share price also spiked but once again the shorters moved in. BKN shorts jumped 2.9ppt to 10.6% from 7.7%, shooting the stock into the 10% club.

But does Bradken’s jump up the table reflect a pairs trade with another mining sector servicer, UGL ((UGL))? UGL posted its roughly “in line” result this week but last week UGL shot out of the 10% plus club with a 3.9% drop in shorts to 7.7% from 11.6%. Bradken and UGL basically swapped places, and then there’s Mona in the mix as well.

Fun and games in that difficult sector.

News Corp ((NWS)) shares have been gradually on the rise following its quarterly result, posted earlier this month, but shorts were also on the increase last week, rising 1.1ppt to 11.2% from 10.1%. News is a long-time member of the 10% plus club but its position is complicated by the pending de-listing of non-ordinary shares.

OZ Minerals ((OZL)) last week published the pre-feasibility study of its Carrapateena copper project and the conclusion from brokers is the project hangs in the balance as a value development. A high level of investment required offsets copper potential and despite its cash balance, OZL would need to find a funding partner willing to take on an underwhelming return projection. OZL has returned to our table after last week’s 1.0ppt rise in shorts to 5.8% from 4.8%.

We bid au revoir to Papillon Resources ((PIR)) nonetheless, which despite having not yet reported saw its shorts drop 3.4ppt last week to 1.8% from 5.2%.

Another to parachute out of our table is IOOF Holdings ((IFL)), which saw its shorts drop 3.8ppt to 2.3% from 6.1%. Just as well, as the oddfellows’ result beat expectations this week and IFL’s share price shot up.

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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