The Short Report

This story features MINERAL RESOURCES LIMITED, and other companies. For more info SHARE ANALYSIS: MIN

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 April 14, 2016

Last week saw the ASX200 bottom out just above 4900 before a commodity price rally sparked a surge back through 5000, en route this week to 5200.

The level of overall shorting activity, either opening or closing of positions, continued to dwindle last week. Aside from a couple of exceptions, there was little movement up or down the table and at seven stocks, the elite 10% plus shorted club is suffering as low a membership as it has done for a long time.

We note that minerals processor and iron ore producer Mineral Resources’ ((MIN)) shorts fell to 5.4% from 7.6% last week but I’ll refrain from suggesting the shorters have finally given up hope on the stock. Mineral Resources has been ping-ponging up and down the table for a few weeks now, having not long ago been a 10% club member.

Of more interest is the ongoing growth of short positions in infant formula producer Bellamy’s Australia, which have grown to 8.1% from 6.5% the week before and under 5% the week before that. Almond producer Select Harvests has enjoyed a rebound but also an increase in shorts to 7.3% from 6.0%.

Perhaps of most interest this week is certain stocks that are no longer in the 5% plus table.

Once high flyers G8 Education and Greencross were earlier in the year members of the 10% plus club but last week G8 disappeared out of the 5% plus table from 5.5% and Greencross from 6.0%. A more mature Carsales.com once rose into the middle of the table but it, too, dropped out last week, from 5.5%.

Weekly short positions as a percentage of market cap:

10%+

MTS    16.4
WOR   15.1
MYR   14.0
PRY    12.4
ORI     11.5
FLT     11.4
MND   10.2

No changes

9.0-9.9%

AWC, CAB, JBH
 
Out: AWE      

8.0-8.9%

WOW, AWE, BAL, IGO

In: AWE, BAL, IGO

7.0-7.9%

GUD, WSA, SHV, OSH, RFG, SEK, SGH

In: SHV                      Out: IGO, MIN

6.0-6.9%

IVC, BEN, MRM, NWS

Out: BAL, SHV, GXL

5.0-5.9%

ALQ, CTD, CDD, AAC, SUL, MIN, AHY, WHC, PDN, IFL, BOQ, TFC, QUB

In: MIN, BOQ                        Out: GEM, CAR, SGM

Movers and Shakers

The week before last, infant formula producer and 2015 high flyer Bellamy’s Australia ((BAL)) jumped into the 5% plus table at 6.5% from under 5% and last week Bellamy shorts increased a further 1.6 percentage points to 8.1%.

Bellamy’s share price began to lose altitude as we entered 2016 having reached what many considered overbought levels. Since then China has tightened up its import tariff rules, directly impacting on those Australia products that suddenly became hot property in China in 2015, including anything to do with milk. But given the Chinese were already paying much higher prices though “grey” market online channels, brokers do not believe milk product sales will suffer a big drop in revenue.

Bellamy’s share price subsequently bounced last week but this has only served to fire up the shorters.

Analysts were warning in mid-2015 that the drought in California that resulted in soaring almond prices would eventually break and thus producer Select Harvests ((SHV)) was a risky buy at its giddy heights. Sure enough, down came almond prices and Select Harvests share price through the second half of the year.

Now talk has swung the other way, with analysts suggesting the stock has gone from overbought to oversold given the longer term upside of processed nut demand. And sure enough, the stock bounced quite sharply last week. But again, this only fired up the shorters. Select Harvest shorts rose 1.3ppt last week to 7.3% from 6.0%.

Before Bellamy’s, Blackmores and others took centre stage last year as the high flyers of the market, child care centre owner G8 Education ((GEM)) and veterinarian/pet care retailer Greencross ((GXL)) were two of the big movers. Online classifieds pioneer Carsales.com ((CAR)) is more of a longer dated success story but that stock bucked the general trend in early 2016 and flew northward in a hurry as well.

Calls of “overbought” piqued interest amongst the shorters. Subsequently, both G8 and Greencross spent some time in the 10% plus shorted club while Carsales moved up into the middle of the 5% plus table. More recently the shares in all three have stalled somewhat, and it appears the shorters have gradually lost interest.

All three are missing from the 5% plus table as of last week, with G8 and Carsales both falling from 5.5% and Greencross from 6.0%.

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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