The Short Report

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

The company is included in ASX300 and ALL-ORDS

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 March 24, 2016

Last week saw the ASX200 peak out at around 5180 before oil prices and oil-related bank provisions took us back towards, inevitably, 5000.

Perhaps the most notable elements of the table below, showing movements in stocks with short positions of 5% or more, is (a) it’s all green towards the top, meaning short reductions, (b) the number of stocks over 10% shorted has now much reduced from the peak in January, indeed almost by half, (c) the biggest short position is now only 16.7% when numbers above 20% had prevailed for some time, and (d) by the time we get into the 7% and above bracket, the stock numbers really do start to thin.

One might argue the market is struggling at present to find good reason to buy, but we might also conclude its struggling to find good reason to short as well.

I have talked a great deal about certain stocks in the top echelons of late so there’s no point in continually repeating their stories. Suffice to say, with retailers Myer ((MYR)) and Metcash ((MTS)) seeing some short-covering recently, contractor Monadelphous ((MND)) had been shot to number one shorted position without actually suffering an increase, but last week Mona shorts fell to 13.1% from 17.3% for no obvious reason to leave Metcash back in the familiar number one position.

Mineral Resources ((MIN)) has seen its shorts flying around a lot of late and last week brought a drop to 8.5% from 11.1%.

Cabcharge shorts rose to 12.6% two weeks ago ahead of last week’s release of the company’s new booking app, but last week fell back to 10.4%.

In terms of new stories, last week saw nickel/gold miner Independence Group jump up to 6.3% shorted from somewhere under 5% the week before. Independence has been a 5% table member in the past, so more interesting perhaps is the addition last week of some new faces at the low end of the table.

Sneaking into the 5% bracket last week were high-flying snake oil peddler Blackmores, high-flying baby formula producer Bellamy’s Australia, and logistics company Qube Holdings, which is in the process of attempting a JV takeover of Asciano’s ((AIO)) Patrick business.

Weekly short positions as a percentage of market cap:

10%+

MTS    16.7
PRY    14.6
MYR   14.1
WOR   13.4
MND   13.1
FLT     12.2
ORI     12.0
WSA   11.3
CAB    10.4

Out: AWE, MIN

9.0-9.9%

AWE, AWC, JBH
 
In: AWE         Out: WOW

8.0-8.9%

WOW, MIN

In: MIN, WOW

7.0-7.9%

SEK, OSH, GUD, IVC, TFC, RFG

Out: MRM

6.0-6.9%

BEN, SHV, MRM, BDR, SUL, GEM, IGO, NWS, GXL, PDN, CTD, SGH, ALQ, FMG

In: MRM, BDR, IGO, CTD               Out: KCN

5.0-5.9%

WHC, CAR, SGM, AAC, IFL, CDD, BOQ, CQR, BKL, BAL, MGX, QUB

In: BKL, BAL                        Out: BDR, CTD, KAR, ORE, BKN, TEN

Movers and Shakers

Normally in this section I would highlight movements in short positions of one percentage point or more but I’m guessing that like myself, readers are probably sick of hearing about the likes of Metcash, Myer, Mona, Mineral Resources and Cabcharge. These are ongoing stories that don’t change much, and have been covered sufficiently in previous Short Reports.

I will highlight that Independence Group ((IGO)) is back into the 5% plus table having jumped from below 5% all the way to 6.3% last week. When Independence last appeared, the company was in the process of taking over Sirius Resources and that likely had an influence on shorts, with traders playing the long-short takeover game. This time, however, it appears Independence is simply being shorted in its own right.

Recently the nickel price fell as low as 2003 levels, which put it into the pre-China “super-cycle” era. Some analysts do expect a rebound, but not in the immediate term it would appear. Australian gold miners had had a good run into 2016 as the USD gold price rallied and the Aussie dollar fell, but now the currency has shot back up again and USD gold is struggling to gain any further traction. Perhaps reasons to short Independence.

What I would like to highlight this week is some new faces at the low end of the table. One is Qube Holdings ((QUB)), who initially made a counter-bid for Asciano’s Patrick stevedoring business in an attempt to gazump rival Brookfield, but now looks set to acquire 50% in a joint venture. Takeover plays are popular with hedge funds who like to buy the target and short the suitor, on the assumption the first bid is never the last and will have to be sweetened to the benefit of the target but detriment of the suitor.

The other new faces this week, sneaking in at a little over 5% shorted, are Blackmores ((BKL)) and Bellamy’s Australia ((BAL)). Both saw their share prices soar to the heavens in 2015 as the Chinese piled in to buy Blackmores’ health supplements in a jar, such as eye of newt and what have you (if that isn’t coals to Newcastle I don’t know what is), and Bellamy’s milk products, particularly infant formula.

The question was also going to be just how high can these stocks fly, as their PEs pushed towards silly numbers, and indeed both companies have seen their share prices cool off a bit in 2016. But it looks like the shorters are hoping for more.

 

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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