The Short Report

This story features BEGA CHEESE LIMITED, and other companies. For more info SHARE ANALYSIS: BGA

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 June 22, 2017

Those of a certain age may remember the first ever video game, Pong, which offered arguably less excitement than the latest version of Grand Theft Auto. But if we call one Pong paddle an ASX200 level of around 5680, and the other around 5800, no better analogy describes the current fluctuations of the Australian stock market.

Last week was the turn of the index to go down again, ahead of this week’s rally back to, as I write, 5800. We might evoke another game analogy and say “Return to Go”.

While the table below exhibits a lot of red and green, a lot of it is bracket creep. But there were some sizeable moves in short positions as well last week, with capital raisings playing their part.

Bellay’s Australia ((BAL)) raised capital to acquire a canning factory, its share price took off, and shorts dropped to 5.5% from 10.4%. In the same space, Bega Cheese ((BGA)) raised capital to pay down debt, including that accrued from buying Vegemite, and its shorts have jumped to 8.7% from 6.5%. Why one down, one up? See below.

Qube Holdings’ ((QUB)) raising, required to further fund its Moorebank intermodal terminal, is now concluded and the stock has fallen out of the 5% plus shorted table. Heading that way is Vocus Communications ((VOC)), not because of a raising but because of a bid from private equity. Vocus has dropped down another bracket to 7.8% shorted.

Brokers believe the sell-off in lithium miner Galaxy Resources ((GXY)) has been overdone, and ratings upgrades have followed. But Galaxy shorts rose to 9.2% from 7.6% last week. Peer Pilbara Minerals ((PLS)) also jumped into the 6% bracket from the 5%.

It was an interesting week last week in the gold space. Shorts in Saracen Minerals ((SAR)) fell to 7.4% from 9.4%, shorts in Perseus Mining ((PRU)) fell to 6.7% from 8.5%, and Beadell Resources ((BDR)) dropped out of the 5% plus table.

But it was replaced by Dacian Gold ((DCN)).

Finally we note shorts in Sirtex Medical ((SRX)) rose to 6.6% last week from 5.2%. A tad unfortunate given following an announcement the company was downsizing, Sirtex shares leapt 17% yesterday.

Weekly short positions as a percentage of market cap:

10%+

ORE    20.1
SYR    19.6
WSA   16.0
IGO     15.6
MYR   15.4
ACX   13.2
MTS    13.2
MYX   13.0
ISD     12.4
RFG    12.0
FLT     11.9
JBH     11.9
DMP   11.9
AAD   11.4
SHV    10.8

Out: BAL                   

9.0-9.9%

HVN, GXY, NEC
 
In: GXY                      Out: SAR                                                       

8.0-8.9%

BGA, JHC, EHE, QIN, CTD, BKL

In: BGA, CTD, BKL              Out: VOC, PRU

7.0-7.9%

GTY, HSO, MND, VOC, OFX, AHG, NWS, SAR, TPM, IPD

In: SAR, VOC                        Out: GXY, CTD, BKL, BEN

6.0-6.9%

MYO, BAP, BEN, PRU, SRX, PLS, IFL, GXL, RWC, RIO, NXT, SEK

In: PRU, BEN, SRX, PLS, GXL, NXT, SEK                       Out: BGA, CSV

5.0-5.9%

CSV, MSB, KAR, BAL, AWC, AAC, VRT, OSH, AWE, RCG, HT1, CCP, DCN, WGX, BDR, MTR, QUB

In: BAL, CSV, AWE, RCG, HT1, DCN                  

Out: SRX, GXL, SEK, PLS, NXT, WGX, BDR, MTR, QUB

Movers and Shakers

Under normal circumstances, if a company raises capital through a rights issue it’s typical to see hedge funds go in and short the stock, looking to take up the discounted rights for an arbitrage profit. That’s why for example, we saw shorts in Qube Holdings jump recently before falling back again.

It would also explain why shorts in Bega Cheese jumped to 8.7% last week from 6.7%. Last week Bega announced a capital raising to pay down the debt it took on board to purchase the grocery business of Mondelez International in January, thus cementing Australia’s favourite sandwich combination of cheese and Vegemite.

Interestingly, Bega’s raising was way oversubscribed and the share price has run up since, suggesting shorters looking for the arbitrage may have made the wrong call.

It certainly would have been the wrong call to try to arbitrage Bellamy’s raising, as the stock price has soared. Mathematically, a capital raising dilutes the earnings per share of a stock and thus, ceteris paribus, should prompt a share price fall, but then it all depends on why the company is raising capital.

Bellamy’s will use the capital to acquire the factory that does its canning and to pay Fonterra to reset its supply agreement. The bottom line is this is all a step towards the dairy company securing Chinese Food & Drug Administration registration, allowing Bellamy’s to more securely tap into surging Chinese demand for infant formula and other products.

The stock price has surged as a result, and rather than play the short arbitrage, existing short positions have bailed in a hurry (assuming ASIC data is accurate). Bellamy’s shorts have crashed to 5.5% from 10.4%.

One of the most volatile stocks on the market of late has been that of Galaxy Resources, proving lithium mining is at once a glowing opportunity in today’s electric world and a very difficult proposition. Galaxy shares took a bath two weeks ago.

But this prompted both Macquarie and Citi to upgrade to Buy (or equivalent). Galaxy’s share price has since stabilised rather than recovered, but Galaxy shorts rose to 9.2% last week from 7.6%. It’s still a long way to go to meet producing peer Orocobre ((ORE)), which still sits a-top the table on 20.1% shorted, followed by graphite producer and battery-related peer Syrah Resources ((SYR)) on 19.6%, followed by daylight.

Lithium hopeful Pilbara Minerals saw its shorts rise to 6.6% from 5.4% last week.

The US dollar gold price has had some volatile moments of late, balancing out Fed rate hikes, a weaker US dollar, a low inflation world, and hints at possible ECB tightening. If we then translate through the currency to Aussie dollar gold, the picture becomes even more complicated.

Aussie gold stocks have been up and down and maybe this has prompted activity on the short side, or scared frustrated shorters off. Either way, shorts in Saracen Minerals fell to 7.4% last week from 9.4%, shorts in Perseus Mining fell to 6.7% from 8.5% and Beadell Resources dropped out of the 5% plus table, but Dacian Gold popped in at 5.0%.

 
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.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

Click to view our Glossary of Financial Terms