The Short Report

This story features FORTESCUE LIMITED, and other companies. For more info SHARE ANALYSIS: FMG

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 4, 2014.

Last week just caught the very butt end of the result season and subsequently saw shorts jump for Retail Food Group and Pacific Brands. The latter is facing balance sheet issues and has been forced to sell off its prized Workwear business. Thereafter the big story of the week was the falling iron ore price. This was reflected in notable short increases for BC Iron, Fortescue Metals and Mineral resources while Atlas Iron retains top spot on the most shorted list.

Long-time short favourite Cochlear was looking like it might even fall in to single digits but now that its post-result rally has petered out, the shorters are back. Aside from a bit of bracket-creep in both directions, last week's big short moves were all increases, with no decreases among the more shorted stocks to report.
 

Weekly short positions as a percentage of market cap:

10%+

AGO   16.0
ACR    14.6
COH   14.4
MTS    13.2
MYR   12.5
JBH     11.8
NWS   11.5
PDN    10.4

Out: TRS

9.00-9.99%

TRS, NXT, ILU, MND

In: TRS, MND                        Out: CAB

8.00-8.99%

DSH, RRL, CAB, BKN, FMG, UGL

In: CAB, FMG           Out: KAR

7.00-7.99%

KAR, MIN, BLY, WHC, RFG, MSB, NUF, ASL

In: KAR, MIN, RFG              Out: MND, FMG, VET

6.00-6.99%

VET, BCI, WSA, ALQ, SGM, BRU

In: VET, BCI              Out: MIN, MTU, VRT

5.00-5.99%

LYC, FLT, VRT, OZL, MTU, TEN, SPL, KCN

In: VRT, MTU, KCN             Out: RFG, SGT, GNC, GWA

Movers and Shakers

Last week was all about the plummeting iron ore price but Atlas Iron ((AGO)) held its ground in terms of share price, seeing little change in its market-leading short percentage. The same cannot be said for Fortescue Metals ((FMG)) nevertheless, which saw its shorts increase by 1.2ppt to 8.4% from 7.2%.  Even more pronounced was the short increase for BC Iron ((BCI)), which entered our 5% plus table last week with a bullet into the 6% range. BCI shorts rose 1.9ppt to 6.6% from 4.7%.

Mineral Resources ((MIN)) is another iron ore miner, albeit not a pure-play, and its shorts rose 1.0ppt last week to 7.9% from 6.9%. As Macquarie pointed out this week, nevertheless, MIN is sitting on a pile of cash and a pile of manganese and has the option to simply curtail its iron ore production, as it has done in the past, sell off its manganese and perhaps even use its cash to pick off one of its junior iron ore peers while they are struggling.

Moving away from rocks, the post-result surge for Cochlear ((COH)) peaked out last week and the stock suffered a bit of a pullback. Just when it looked like this long incumbent most shorted stock might actually exit the elite 10% plus club, the shorters are back. COH shorts rose 1.7ppt to 14.4% from 12.6% to re-establish normal programming. It should be noted COH attracts six Sell ratings and two Holds in the FNArena database.

Retail Food Group ((RFG)) reported last week and while its result was in line with expectations, FY15 guidance was a little disappointing. This didn’t stop its share price rallying nonetheless, which may explain why the shorters stepped up their interest. RFG shorts rose 2.2ppt to 7.4% from 5.2%.

On the “ones to watch” list week this week we find Pacific Brands ((PBG)), which saw its shorts increase to 3.9% from 2.9%. It’s not enough to feature in our table yet but PBG is a company in trouble, as evidenced by the news it has been forced to start selling off the farm. The company has sold its key King Gee workwear label in order to prop up the balance sheet.

Particular mention this week goes to Myer ((MYR)). This stock has been a member of the 10% plus club for a very long time and this morning reported a “miss” on its full-year result which, as I write, sees its share price down 8%.

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