The Short Report – 11 Feb 2021

This story features INVOCARE LIMITED, and other companies. For more info SHARE ANALYSIS: IVC

See Guide further below (for readers with full access).

Summary:

Week ending February 4, 2021.

Last week saw the ASX200 initially tumble on unnecessary reverberations from the GameStop affair in the US, before swiftly rebounding to push to higher highs.

The GameStop game has now been run and lost. The stock has fallen -90% from its highs. While one short-side US hedge fund was indeed badly burned in the squeeze, and others found themselves smarting, the question is as to how many of the Reddit crowd managed to get out of their longs with a profit when the music inevitably stopped.

If they were forced to sell at a loss, and were leveraged, it is possible they will not be able to pay up, leaving the likes of popular retail broker Robinhood to carry that loss. That is why the broker, and others, were forced to restrict trading, and why Robinhood in particular was forced to raise billions in fresh venture capital.

The fever spread to Australia, where the uneducated thought they, too, could play the short squeeze game. But no stock in Australia is as heavily shorted as those in the US, particularly GameStop. Indeed shorts on the ASX are currently notably benign.

Highlighted in last week’s Report as shorted stocks in Australia that appeared in particular to have been “GameStopped” were InvoCare ((IVC)) and Zip Co ((Z1P)). Both saw short positions swiftly retreat after the initial attack and both retreated even further last week.

InvoCare shorts are down to 6.9% from 7.4% and Zip shorts have fallen to below 5% from 5.4%.

Perhaps it’s a lesson best learned by allowing the child to put its hand in the fire.

The most shorted stock on the ASX – Webjet ((WEB)) – saw its shorts fall to 13.3% from 14.3% last week. Another heavily shorted stock – Mesoblast ((MSB)) – saw a fall to 8.8% from 10.2%.

Let’s hope we can call this game over.

Back in the real world, shorts in Northern Star Resources ((NST)) rose to 11.6% last week from 7.5% the week before, and 6.8% the week before that. There has been much speculation, in the face of the GameStop affair, as to why this is the case. See below.

Weekly short positions as a percentage of market cap:

10%+
WEB   13.3
TGR    12.3
NST     11.6

In: NST           Out: MSB

9.0-9.9

No stocks
           
8.0-8.9%

MSB, ING, WSA

In: MSB, WSA           Out: AVH

7.0-7.9%

AVH, MTS, MYR, SSM

In: AVH                      Out: NST, WSA, FLT, A2M, IVC

6.0-6.9%

FNP, FLT, IVC, RSG, A2M, EML

In: FLT, IVC, A2M                Out: NST, Z1P                       

5.0-5.9%

EOS, NEA, ALK, BOQ, TYR, CUV, BVS

In: TYR                       Out: Z1P

Movers & Shakers

Gold miner Northern Star Resources is in the process of merging with Kalgoorlie Super Pit neighbour Saracen Minerals ((SAR)). I have heard two suggestions as to why Northern Star has drawn so much short interest (11.6%), neither being related to “GameStopping”.

One is that shorters “don’t like” the merger, or see the two miners as overvalued, but that would not explain why the share price of both have steadily fallen over the past month. (The fall in the gold price would.)

The other is that the merger process has hit teething problems. Aside from the fact the various approvals required have so far been met without a hiccup, why is Northern Star 11.6% shorted and Saracen Minerals 0.04% shorted? Surely any problems would suggest short positions in both.

This disparity in short positions provides a clue. In any merger, each partner is valued individually by what the merger deal implies by virtue of the split the number of shares the shareholders of each company receive in the merged entity. It is possible the shorters see a disparity in value.

Thus I’d wager, without knowing for sure, that the holders of Northern Star shorts are long Saracen on the other side, ahead of receiving shares in the merged entity by virtue of that Saracen holding, which will then cover their shorts.

An arbitrage of sorts.

ASX20 Short Positions (%)

Code	Last Week	Week Before	Code	Last Week	Week Before
ALL	0.3	0.2	MQG	0.4	0.5
ANZ	1.1	1.1	NAB	1.2	1.2
APT	1.2	1.4	NCM	0.1	0.0
BHP	3.6	3.5	RIO	0.3	0.4
BXB	0.3	0.3	TCL	0.7	0.7
CBA	0.6	0.6	TLS	0.3	0.4
COL	0.5	0.5	WBC	0.9	1.1
CSL	0.1	0.1	WES	0.5	0.5
FMG	0.3	0.3	WOW	0.2	0.3
GMG	0.2	0.2	WPL	1.0	1.1

To see the full Short Report, please go to this link

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.

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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