The Short Report

This story features METCASH LIMITED, and other companies. For more info SHARE ANALYSIS: MTS

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:

Welcome to the FNArena Short Report in 2016.

In the summer break there was no lack of action on global and local markets, the highlight clearly being the fall in the oil price. A local highlight was the impact on retailers of the demise of Dick Smith ((DSH)).

Dick is in administration so still features on our short table this week, albeit many shorters had already taken the opportunity to cash in. The stock has dropped into the 6% bracket from the 8% over the break. Dick’s demise proved a fillip for rival JB Hi-Fi (JBH)) but when it comes to this particular stock shorters have long been like a dog with a bone.

Thus while JB Hi-Fi shorts have fallen a couple of percent over the break, the stock remains entrenched in the 10% plus club. Meanwhile, Metcash ((MTS)) and Myer ((MYR)) remain cemented in the number one and two positions.

Lower oil prices have also served to allow shorters to cash in. Santos ((STO)) obliged with a capital raising and thus has dropped off the table from 8% bracket late last year. AWE ((AWE)) has been another popular short target but has dropped out of the 10% club.

But the wolves are still hunting companies servicing the energy and mining industries.

Monadelphous ((MND)) remains stuck in third spot, while WorleyParsons ((WOR)) jumped back into the 10% bracket from the 7% bracket over the break. Orica ((ORI)) is also well entrenched in the 10% bracket.

Among the miners, Mineral Resources ((MIN)) also remains up there as does Alumina ((AWC)), while Western Areas ((WSA)) has solidly moved up the ranks within the 10% club.

In other sectors, fears of government tampering with medical benefits see Primary Health Care ((PRY)) back in the 10% club while a December profit warning for Spotless Group ((SPO)) and subsequent share price plunge saw the shorters cash in. Spotless has dropped out of the table from the 7% bracket.

We now return to regular service. The table below outlines short position movements week on week.

Week ending January 28, 2016

Last week saw the ASX200 bottom out following mostly commodity price-related falls over January, before beginning a stoic push back towards the entrenched 5000 support mark. Movements over the month have been noted above and last week there was not a lot of further movement in short positions at the higher end, save for a bit of bracket creep.

At the lower end of the table, late year saw a new kid on the block in the form of lithium producer Orocobre, which snuck into the 5% bracket. Last week Orocobre jumped another notch into the 6% bracket.

And a brand new player for 2016 appeared last week, in terms of 5% or more shorted, in the form of almond producer Select Harvests, which jumped from under 5% into the 6% bracket last week.

Weekly short positions as a percentage of market cap:

10%+

MTS    20.7
MYR   19.8
MND   17.0
WSA   16.0
ORI     15.8
FLT     14.1
MIN    14.0
AWC   13.8
JBH     13.2
GXL    13.1
PRY    11.8
CAB    11.6
WOR   10.9    
SEK    10.1

In: SEK          

9.0-9.9%

VOC, WOW, AWE, SUL
 
Out: SEK, GEM

8.0-8.9%

WHC, IVC, TFC, FMG, GEM, RFG, SGH

In: GEM, TFC, SGH              Out: CAR

7.0-7.9%

KAR, CAR, MRM, ARI, SGM

In: CAR          Out: TFC, SGH, ALQ

6.0-6.9%

ALQ, DSH, PDN, SYR, SHV, ORE, GWA

In: ALQ, SHV, ORE             

5.0-5.9%

SVW, ILU, NWS, CTD, IFL, BPT, BKN, MGX, AAC, AHY, SWM, IMF, RRL

In: IMF, SCP              Out: ORE, UGL

Movers and Shakers

Lithium means batteries, and the 2010s will likely go down in history as the decade which saw a step-jump in battery technology and a subsequent sounding of the death knell, possibly, for coal-fired power. This prospect has not been lost on investors, who have taken lithium producer Orecobre’s ((ORE)) share price up a dollar to around $2.40 since early December.

The rally occurred despite the company needing to raise capital to overcome cash flow issues. Brokers don’t yet believe Orecobre is out of the woods but concede the lithium story is a very strong one. Short traders have taken an interest, and last week Orecobre shorts rose 1.2 percentage points to 6.3% from 5.1%.

Local almond producer Select Harvests ((SHV)) enjoyed a cracking first half to 2015 as global almond prices soared due to persistent drought in the world’s major almond-producing region of California. But alas, the drought broke, almond prices peaked, and Select Harvests’ share price has done nothing but lose all that ground ever since.

Brokers warn there may yet be more downside to almond prices, and clearly the shorters have listened. Having not previously appeared in our 5% plus shorted table, Select debuted last week on 6.4% shorted.

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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