The Short Report

This story features JB HI-FI LIMITED. 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 July 27, 2017

Last week the ASX200 ran back from the bottom of the range to the top of the range, again.

In last week’s Report I highlighted a lot of red in the table, meaning short position increases, when typically an approaching reporting season sees short positions trimmed. Well, this Report shows that’s exactly what did happen last week. There’s a lot of green below.

Among the most shorted stocks in the market, we have a new leader. Nickel has knocked off batteries.

Western Areas’ ((WSA)) June quarter production report met guidance and broker forecasts. Recent strength in the nickel price has seen the stock enjoy a rising share price. This has proven fodder for the shorters, who are likely backing a nickel price retreat. Western Areas shorts are now at a market-leading 19.9%, up from 17.5%.

There may be a few cold feet among shorters of JB Hi-Fi ((JBH)), given that company has a track record of beating expectations. JB shorts fell to 13.5% from 15.0%.

If there were cold feet evident among shorters of iSentia ((ISD)), that’s unfortunate. Shorts fell to 10.4% last week from 11.8% and this week the company issued a profit warning and copped a -20% share price hiding.

There’s been no new news from Greencross ((GXL)) of late, but its shorts fell to 5.1% from 7.1%.

Weekly short positions as a percentage of market cap:

10%+

WSA   19.9
ORE    18.7
SYR    17.0
MYR   16.4
IGO     14.2
JBH     13.5
RFG    12.1
MTS    12.1
AAD   12.0
DMP   11.5
MYX   11.3
ACX   11.2
HVN   11.1
ISD     10.4
SHV    10.3

Out: FLT                                

9.0-9.9%

FLT
 
In: FLT                        Out: JHC, GTY, A2M                                                                                   

8.0-8.9%

GXY, A2M, JHC, AHG, CTD, GTY, BKL, HSO, QIN, NEC

In: A2M, JHC, GTY, QIN    

7.0-7.9%

TPM, BEN, NXT, APO, RIO, RWC, AYS, NWS BAP, SAR, PRU, GXL, NWS

In: AYS          Out: QIN, BAP, SAR, PRU, GXL

6.0-6.9%

BAP, SEK, MND, IPD, OSH, EHE, PRU, SAR, VOC, OFX

In: BAP, PRU, SAR               Out: AYS, BAL, VRT, NSR

5.0-5.9%

VRT, NSR, AWC, PPT, AAC, CCP, CSR, BAL, GEM, IFL, BGA, GMA, GXL, TAH, KAR

In: GXL, VRT, NSR, BAL, CSR, GMA                   Out: CSV, DCN, AWE, RCG

Movers and Shakers

Nickel producer Western Areas carries no debt and produces at a low cost, providing some buffer against nickel price downside. Otherwise the stock runs up on nickel price upside, as has been the case recently. The miner’s June quarter report showed production coming in at the high end of guidance and costs at the low end, as brokers had expected.

Yet no FNArena broker rates the stock a Buy, rather there are five Holds and two Sells on the database. The reason for this was best summed up by Deutsche Bank, who calculated that at current valuation, the market is pricing in a flat US$6.50/lb nickel price. Current spot is US$4.67/lb.

Western Areas is now the most shorted stock on the ASX, at 19.9%. Of the top five most shorted, four are nickel, lithium or graphite miners.

The last broker report seen on vet & pet care chain Greencross came in at the end of June. UBS cut its sales growth and margin forecasts for the company. The share price has declined ever since.

Shorters have decided to cash in, it would seem, not prepared to risk an upside earnings surprise. Hence a 2ppt drop in shorts to 5.1%.

 
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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