The Short Report

This story features MYER HOLDINGS LIMITED, and other companies. For more info SHARE ANALYSIS: MYR

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 September 8, 2016

Last week we saw the ASX200 continue its correction as Fed rate rise fears led to the dumping of overvalued yield stocks and resource stocks, the latter due to assumed pressure on dollar-denominated commodity prices.

Yield stocks are not particularly popular with short traders for the obvious reason that their dividend yields provide a natural share price floor. The same can be said for high cash flow mining and energy names that also pay reasonable dividends. There is nevertheless a smattering of pure-play resource stocks among those 5% or more shorted, and of course resource sector service companies.

Otherwise our short table is dominated by stocks offering potentially high, but perhaps risky, growth, and those facing structural issues. The latter includes long term incumbents such as Myer ((MYR)), Metcash ((MTS)), Flight Centre ((FLT)) and Cabcharge ((CAB)).

Also structurally challenged is Woolworths, which last week saw its shorts jump a percentage point to 8.7%.

We see a lot of red on the table below, and a lot of the former group of high growth and “new world” names. Making sharper moves up in short position last week we find the likes of Bellamy’s Australia, Blackmores and Estia Health.

Also jumping up last week was NextDC, from under 5% to 8.9%, but this can be explained by the company’s rights issue.

Weekly short positions as a percentage of market cap:

10%+

WOR   16.0
MYR   15.6
MTS    12.2
WSA   11.3
MND   11.0
FLT     10.7
BAL    10.1

In: BAL

9.0-9.9%

CVO, AWC
 
Out: BAL       

8.0-8.9%

NXT, WOW, ORI, MYO, BKL, IFL, BEN

In: NXT, WOW, MYO, BKL                       

7.0-7.9%

EHE, TFC, CAB, DOW

In: EHE                       Out: MYO, WOW, BKL

6.0-6.9%

NEC, IVC, SYR, SGH, SGM, AWE, PRY, IGO

In: IGO           Out: EHE, NWS

5.0-5.9%

SEK, NWS, JHC, MSB, OSH, PDN, KAR, GEM, JBH, CTD

In: NWS, PDN, GEM, JBH   Out: IGO, ISD

Movers and Shakers

Last week’s Report extensively covered increases in short positions for the new sub-sector of residential aged case providers, specifically Estia Health ((EHE)) and Japara Healthcare ((JHC)). The hardest hit due to both overvaluation and regulatory risk has been Estia, which has been climbing steadily up the table. Last week Estia shorts rose to 7.9% from 6.7%.

The two most prominent names when it comes to the Chinese consumer growth story are dairy products supplier Bellamy’s Australia ((BAL)) and dietary supplements supplier Blackmores ((BKL)). Both have recently suffered from changes to Chinese regulations.

The August result season showed Bellamy’s had coped quite well, but a brief share price rally has since fizzled out. Last week saw Bellamy shorts rise by 0.9ppt to take the stock into the elite 10% plus shorted club at 10.1%.

Blackmores posted a disappointing result and its shares have fallen ever since. The shorters seem in no mood to cash in just yet however, given last week Blackmores shorts rose to 8.1% from 7.0%.

Just when investors thought it might be safe to return to the Woolworths ((WOW)) waters following the Masters capitulation, joint venture partner Lowe’s has clouded the issue by questioning the process. Woolworths shorts last week rose to 8.7% from 7.7%.

Speaking of clouds, the growth of data storage in the cloud is one reason you’ll struggle to find brokers say anything negative about data centre operator NextDC ((NXT)). But last week NextDC shorts jumped from below 5% to 8.9%.

This is not, however, a naked short play. In order to fund the construction of a second data centre in Sydney due to strong demand, having already begun building second centres in Brisbane and Melbourne, NextDC has undertaken a rights issue.

Rights issues provide the opportunity for hedge funds to “arbitrage” by shorting the shares and then picking up the equivalent number of rights at a discount. The ploy is not without risk, given the shorter can end up being allocated too few/many rights and the share price could take off in the meantime.
 

ASX20 Short Positions (%)

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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