The Short Report

This story features WORLEY LIMITED, and other companies. For more info SHARE ANALYSIS: WOR

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 1, 2016

Last week we saw the August result season wrapped up. Throughout almost the entire month the index tracked sideways on a lack of macro drivers, masking some sharp underlying movements in individual stocks following their earnings reports.

Despite these sharp movements we did not see a lot of significant movements in short positions in our 5% table across the reporting season. This is likely testament to the fact the number of stocks carrying short positions in excess of 5% is currently at its lowest level in the history of this Report.

As August wrapped up and September began, renewed fears of a Fed rate hike suddenly hit the market and a sell-off has followed. With a particular exception, there was again not a lot of change in short positions last week beyond some further shuffling in the 10% plus bracket. WorleyParsons ((WOR)) shorts ticked up to just pip those of Myer ((MYR)), providing a new gold medallist.

Shorts in Metcash ((MTS)) fell back again after rising the week before as the Home Timber & Hardware acquisition was ratified.

The big story last week nevertheless came from the residential aged care sector. To that end, we welcome Japara Healthcare back into the 5-6% bracket where it has occasionally popped up before, and for the first time, we welcome Estia Health, debuting in the 6-7% bracket.

Weekly short positions as a percentage of market cap:

10%+

WOR   16.0
MYR   15.9
MTS    11.9
MND   11.2
FLT     10.8
WSA   10.3

In: WSA

9.0-9.9%

AWC, BAL, CVO
 
In: AWC, CVO                      Out: WSA, ORI         

8.0-8.9%

ORI, BEN, IFL

In: ORI                       Out: AWC, CVO, MYO

7.0-7.9%

CAB, MYO, WOW, DOW, TFC, BKL

In: MYO, TFC, BKL              Out: IVC

6.0-6.9%

NEC, SYR, IVC, SGM, SGH, EHE, AWE, PRY, NWS

In: IVC, EHE             Out: TFC, BKL, ISD, OSH, IGO

5.0-5.9%

ISD, IGO, SEK, CTD, OSH, MSB, JHC, KAR,

In: ISD, IGO, OSH, JHC                   Out: QUB

Movers and Shakers

It’s been a wild old ride of late for the relative newcomers into the listed arena representing the residential aged care sub-sector. The “ageing population” theme proved popular with investors heading into result season, pushing the valuations of Estia Health ((EHE)), Japara Healthcare ((JHC)) and Regis Healthcare ((REG)) into stretched territory.

Disappointing results from Estia and Japara thus prompted sharp sell-offs, with Regis coming out relatively unscathed. But this was only the beginning of the real problem.

All three companies responded to the issue of proposed additional government service charges for aged care by suggesting the impact could be offset in the next couple of years with capital refurbishment fees and other measures. In short, the government said no, sparking very sharp sell-offs in all three stocks. Investors bailed out in panic.

We have since seen some fairly sharp rebounds in share prices as bolder investors moved in to exploit what was seen as an overreaction and a swing into undervalued territory on capitulation. Brokers have reset their earnings forecasts lower but have either maintained or upgraded recommendations (to date) with one exception, being Morgan Stanley downgrading Japara to Sell post-result.

Prior to these rebounds we saw the shorters move in. Japara has been in and out of the bottom of the 5% plus table a few times and last week was back at 5.3%. Estia has not been spotted before and last week debuted at 6.7%. Regis remains well out of the table on 1.4%. 
 

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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