The Short Report

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

.ref1 {background-color:#B8E3F8;}

By Andrew Nelson

Significant increases in short positions outweighed significant decreases for the week to August 15. There were only four companies that experienced a total short decrease of more than 1.0 percentage point, while there were eleven instances of shorts increasing by more than 1.0 percentage point over the course of the week.

CSR ((CSR)) finds itself on top of the short increase leader board, with total shorts increasing by 2.18 percentage points from 7.31% to 9.49% over the course of the week. Earlier this week UBS downgraded the stock to Neutral, noting concerns shared by most brokers about the outlook for aluminium prices. The stock is neutrally regarded by the major brokers, with 2 Buy calls, 2 Sell calls and 4 Holds reflecting current broker sentiment.

Another noteworthy increase in short position was booked by Primary Healthcare ((PRY)), posting a 1.16 percentage point increase from 1.21% to 3.37%. While the stock is somewhat positively regarded, those brokers more cautious on the stock saw problems with subdued levels of medical centre growth in the FY result last week.

Shorts in Ten Network ((TEN)) picked up by 1.65 percentage points from 4.34% to 5.99%, while short positions in Nufarm ((NUF)) rose 1.49 percentage points from 0.72% to 2.21%. Ten is a widely negatively regarded stock by brokers, with UBS downgrading its forecasts last week after a review of the sector. Nufarm was upgraded to Buy by BA-Merrill Lynch last week on the back of continued improvement in farm margins.

Perpetual ((PPT)) also booked a notable increase, with short positions increasing by 1.32 percentage points over the week from 3.74% to 5.06%. David Jones ((DJS)) increased its overall short positions by 1.3 percentage points from 3.74% to 5.06%, both on slim newsflow.

Discovery Metals ((DML)) lead the list of short position decliners, dropping 2.24 percentage points to a short position of 3.14%, down from 5.38% the previous week.

SingTel ((SGT)) was next on the list, shedding 1.8% to 6.18% shorted from 7.98% after reporting what was a fairly benign Q3 report last week. While the stock is viewed positively by brokers on average, those brokers less disposed to the stock note a soft operating environment and an unclear outlook.

Wesfarmers ((WES)) also found itself less shorted over the period after posting an in-line FY result and a decent increase in overall net profit. In total, short positions decline by 1.23 percentage points to 1.98% shorted from 3.21%.

Discretionary retail exposures again continue to dominate the top 20 list, with investors and brokers alike troubled by the currently uncertain consumer outlook. Significant short positions were maintained by JB Hi-Fi ((JBH)), Flight Centre ((FLT)), The Reject Shop ((TRS)), Harvey Norman ((HVN)), Myer ((MYR)) all in the top 10.

Resource companies also maintained their prominent position amongst the largest shorts in the market. Lynas Corp. ((LYC)) holds the top spot amongst resource plays, maintaining its number 4 position on the top 20 most shorted list. Although, the company’s total short position did decrease by 0.88 percentage points to 10.48% from 11.36% over the week despite delays with respect to the granting of a Temporary Operating Licence.

Iluka ((ILU)) also sits in the top ten list at 9.10% short exposure, while the top 20 also includes, Paladin Energy ((PDN)) Alumina ((AWC)), CSR ((CSR)) and Fortescue ((FMG)).

In terms of month on month numbers, stocks on the decrease far outweighed stocks on the increase, with only 8 stocks booking more than 1 percentage point increases in short positions and 16 stocks booking more than a 1 percentage point decrease.

Billabong ((BBG)) booked the biggest decrease, with its short position falling by 8.05 percentage points to 1.38% from 9.43% on limited newsflow, but most likely increasing hopes about M&A activity.

Carsales ((CRZ)) is another long time resident of the weekly top 20 shorts list, but over the course of the past month short positions decreased by 2.56 percentage points to 8.93% from 11.49% after beating expectations with its full year results last week.

A seemingly perennial top 5 position on the most shored list hasn’t changed much for Fairfax ((FXJ)), which is sitting at number three again this week. However, on a monthly basis the company’s short position has slipped 1.48 percentage points to 11.31% from 12.79% despite little in the way of positive influence over the period.
 

Top 20 Largest Short Positions

Rank	Symbol	Short Position	Total Product	%Short
1	JBH	19932012	98850643	20.16
2	FLT	13457163	100055135	13.45
3	FXJ	267292681	2351955725	11.36
4	LYC	180755315	1715029131	10.54
5	COH	5564276	56929432	9.77
6	CRZ	22428958	233689223	9.60
7	CSR	48021211	506000315	9.49
8	HVN	98931616	1062316784	9.31
9	LNC	45113423	504487631	8.94
10	ILU	37029369	418700517	8.84
11	PDN	71101178	835645290	8.51
12	AWC	192851755	2440196187	7.90
13	WTF	16418452	211736244	7.75
14	MYR	44464479	583384551	7.62
15	TRS	1921827	26092220	7.37
16	DJS	36798252	528655600	6.96
17	SGT	10181529	154444714	6.59
18	GNS	55013785	848401559	6.48
19	BLD	46637901	758572140	6.15
20	MSB	16892693	284478361	5.94

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.

Technical limitations

If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.

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