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The Short Report

Australia | Mar 03 2016

This story features JB HI-FI LIMITED, and other companies. For more info SHARE ANALYSIS: JBH

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 February 25, 2016

Last week saw the ASX200 return to 5000 before slipping back again to 4900 as the reporting season reached a crescendo. We’re back over 5000 as I write. The final and most crowded week brought around very few changes in the 10% plus shorted group, with a couple of notable exceptions.

Vocus Communications has dropped from 16.2% shorted to 4.8% shorted. The company posted a result that was largely in line with broker forecasts, but it did feature a solid performance from the recently merged M2 Communications business and the share price shot up dramatically.

Now, I’ve been caught out before by spurious ASIC data so I will reserve judgement, but suffice to say if the data are accurate they can be explained. Vocus experienced a short-covering rally.

Mineral Resources has seen its share price double since posting a solid beat, and last week its shorts fell to 11.6% from 16.6%. The question must be asked: Do the shorters actually “get” Mineral Resources, and why it should not be tarred with the same brush as junior pure-play iron ore producers?

Otherwise, JB Hi-Fi ((JBH)) and Seek ((SEK)) posted solid results, as they almost invariably do, and both stocks have slipped out of the 10% plus club as a result, albeit not by much.

Lower down the table, Oil Search has made a surprise entry at 8.1% shorted having come from somewhere under 5% previously. I’ll give it another week on this one too, but Oil Search did slightly disappoint on cash flow and its share price did drop somewhat.

Less spurious is a drop in shorts to 5.0% from 7.5% for Arrium. The company very nearly went out the back door after posting a shocker, and has since been rescued by private equity.

Meanwhile, Primary Health Care ((PRY)) shorts remain fixed at 13.8%. I can only suggest the 20% post-result share price rally saw shorts initially covered, then reinstated.

Weekly short positions as a percentage of market cap:

10%+

MYR   20.4
MTS    19.3
MND   17.7
ORI     13.9
PRY    13.8
FLT     13.5
WOR   13.0
WSA   12.7
GXL    12.4
CAB    11.7
MIN    11.6
AWC   11.0
AWE   10.0

Out: VOC, JBH, SEK           

9.0-9.9%

WOW, JBH, SEK, SUL, RFG
 
In: JBH, SEK, SUL                Out: GEM

8.0-8.9%

TFC, GUD, SGH, GEM, FMG, OSH, ALQ

In: GEM, GUD, FMG, OSH              Out: SUL

7.0-7.9%

KAR, IVC, MRM

In: IVC                       Out: FMG, GUD, ARI, BPT, WHC, CAR

6.0-6.9%

CAR, WHC, PDN, AAC, NWS, BPT, SGM, BEN

In: CAR, WHC, BPT, BEN               Out: IVC, SYR

5.0-5.9%

CTD, SYR, AHY, IFL, BOQ, BKN, MGX, PPT, CDD, SCP, GMA, ILU, SVW, KCN, ARI, SHV

In: ARI, SYR, AHY, BKN, KCN                 Out: BEN, CVO, ANN, IMF

Movers and Shakers

Fibre cable company Vocus Communications ((VOC)) was really not on the radar of major broking houses a few months ago, but then suddenly Vocus snapped up both data centre operator Amcom and telco M2 Communications in a merger spree. Brokers began to pay attention.

So, apparently, did the shorters, who probably assumed such a significant and swift leap to becoming a fibre/data/telco force to be reckoned with would come with typical execution difficulties. But the value of M2 was immediately apparent in Vocus’ first half result, being the first post-mergers. Vocus’ share price shot up as the shorters, it would appear, bailed.

Vocus shorts have fallen to 4.8% all the way from 16.2%. We’ll assume the ASIC data are accurate for now, but next week’s numbers may question that.

Yes, Mineral Resources ((MIN)) mines iron ore. No, Mineral Resources is not a junior pure-play iron ore miner. The company’s major source of earnings in the low iron ore price environment is its minerals processing service, which provides annuity-style revenues and ensures the company can boast a strong balance sheet even as the iron ore price has tumbled.

It even means Mineral Resources is in the position to be an opportunistic acquirer at this troubled time. Do the shorters understand that? Or do they simply see a company in the same vein as an Atlas Iron or BC Iron or Grange Resources? Two weeks ago, Mineral Resources was the fourth most shorted stock in the market at 16.6%, having spent a very long time up in such high echelons. Last week the stock’s shorts fell by five full percentage points to 11.6% as the share price proceeded to double. That’s still leaves Mineral Resources among the elite, but for how long?

Early this century, a recently merged company called BHP Billiton spun off its steel businesses into two companies – BlueScope Steel ((BSL)), which produces “flat” steel products in NSW, and Arrium ((ARI)), which products “long” steel products and also operates BHP’s original iron ore mine in South Australia. This reporting season, BlueScope shocked the market with a solid “beat”. So shocking was Arrium’s corresponding “miss” that the market began to assume the company was not long for this world.

A private equity company has since stepped in to provide support, but the shorters appear to have cashed in. Arrium shorts fell to 5.0% from 7.5% last week.

LNG producer Oil Search ((OSH)) has for a long time been considered the least vulnerable of Australia’s big LNG aspirants in the face of the collapsing oil price. The company’s earnings result last week was so-so, roughly in line with expectations, and the share price didn’t do too much. Yet according to last week’s ASIC data, Oil Search shorts have jumped from somewhere less than 5% to 8.1% in one fell swoop.

Oil Search is in the rare position among peers of being able to boast cash flow positive production at the current oil price, as well as substantial growth potential. We did see peer Santos ((STO)) spend a little time in the 5% plus shorted table recently, but it has since dropped out, while heavy dividend payer Woodside Petroleum ((WPL)) and diversified upstream/downstream operator Origin Energy ((ORG)) have never been spotted.

It will be interesting to see next week if ASIC’s numbers are indeed accurate.
 

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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CHARTS

BSL JBH MIN ORG OSH SEK STO VOC

For more info SHARE ANALYSIS: BSL - BLUESCOPE STEEL LIMITED

For more info SHARE ANALYSIS: JBH - JB HI-FI LIMITED

For more info SHARE ANALYSIS: MIN - MINERAL RESOURCES LIMITED

For more info SHARE ANALYSIS: ORG - ORIGIN ENERGY LIMITED

For more info SHARE ANALYSIS: OSH - OIL SEARCH LIMITED

For more info SHARE ANALYSIS: SEK - SEEK LIMITED

For more info SHARE ANALYSIS: STO - SANTOS LIMITED

For more info SHARE ANALYSIS: VOC - VOCUS GROUP LIMITED