The Short Report

This story features NEWS CORPORATION, and other companies. For more info SHARE ANALYSIS: NWS

By Andrew Nelson

Short activity was relatively subdued over the week to 19 September 2012, with just three stocks recording significant moves of over one percentage point. There was just one significant decrease in short positions booked over the week, while only two significant increases were recorded.

The decreases were lead by St Barbara Mines ((SMB)), with the company’s total short position coming off 2.51 percentage points from 3.46% to 0.95% after booking a significant decrease last week as well. The stock remains Neutrally regarded on the FNArena Database, with one Buy, One Hold and one Sell recorded. There has been little in the way of broker commentary on the stock since the FY report in August, although Citi noted at that time that the ongoing Allied Gold ((ALD)) takeover will take some time and will likely impact on sentiment during the process.

A notable, if not significant, improvement in short position was also posted by Carsales.com ((CRZ)), with total shorts declining by 0.93ppt from 7.31% to 6.38%. The stock has dropped a couple of positions on the Top 20 most shorted list, with Macquarie putting out commentary two weeks back that was positive on the company’s performance versus prospective competitor Carsguide ((NWS)). The stock boasts five Holds and a Buy in the FNArena Database.

SingTel ((SGT)) finds itself on the top of the short position increase list this week, with its short position rising 1.6ppt from 7.04% to 8.64%. The stock remains positively regarded on the FNArena Database, which shows no broker commentary on the company since mid-August.

Western Areas ((WSA)) booked the second largest increase in short position, rising 1ppt from 6.61% to 7.61% over the week. The move was enough to see the company join the Top 20 list in the 16th position, adding to the number of mid-cap miners already present on the list. The stock remains a Buy on the FNArena Database, with JP Morgan initiating coverage earlier this month saying it is attracted to the group's high grade operations and resulting strong margins.

While not necessarily posting a significant move, the increase in JB HiFi’s ((JBH)) short position is notable, as it has further cemented the company’s number one ranking on the Top 20 List. Shorts in the stock increased by 0.82ppt from 20.73% to 21.55% over the week, with no quarter being shown to discretionary retailers.

The weekly Top 20 list was little changed over the course of the week. Once again there was the regular jockeying for position, although there were a few new inclusions as well, namely Fortescue Metals ((FMG)) and Western Areas, debuting at positions 17 and 16 respectively.

As said, there were a few minor position changes, the biggest of which was again booked by Cochlear ((COH)), rising from 14th to 12th on the list. Short positions in the stock actually declined 0.57ppt from 8.85% to 8.28%, with news from a few weeks back indicating the company's N5 device failure rate was moderating. The stock remains a Sell on the FNArena Database, with brokers still concerned about the reputational damage and market share losses that are expected because of the N5 issues. Adding to that, analysts at Macquarie last week said the stock is too expensive given a PER of 26x for only 8% EPS growth in FY13 and just 4% in FY14.

Even though the changes to the Top 20 list over the period were limited, resources and resources services stocks have picked up a slightly more prominent position in the Top 20. Lynas ((LYC)), Iluka ((ILU)) and  building materials supplier CSR ((CSR)) remain in the Top 10, while numbers 11-20 are dominated by base materials plays of various description such as Alumina ((AWC)), Paladin ((PDN)) and Fortescue and now Western Areas.

Still, discretionary retail plays continue to man the majority of the top spots on the most shorted list, with the market still concerned about the 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)) and David Jones ((DJS)). All remain in the top 10, with Harvey Norman moving up from 11 to 10 on the list over the week.

There was a bit more in terms of significant movement on a monthly basis, with 15 stocks booking an increase of one percentage point or more, while nine stocks boasted a better than one percentage point decrease in total short position.

Lynas continued to post significant increases on a monthly basis, this week seeing its short position increase by 3.22ppt from 10.52% to 13.74% in monthly terms. The stock remains positively regarded in the FNArena database, with three Buys and two Holds. Broker commentary over the month has been positive post the LAMP approval and a reserve upgrade at Mount Weld. Maybe we’re seeing a bit of a risk hedge being built.

Whitehaven Coal ((WHC)) remained prominent on the monthly increase list, with its short position climbing another 2.5ppt from 1.72% to 4.42% in monthly terms. The good news here is that it seems the pace of increase is declining, as shorts last week were up by 3.04ppt on a monthly basis. Macquarie noted a couple weeks back that the recent AER ruling for the group was a tough one. The stock is Neutrally regarded in the FNArena Database, with four Neutrals, one Buy, one Sell and two Restricteds recorded.

Iluka’s short position also continued to increase on monthly terms, with shorts up 2.10ppt from 9.52% to 11.53%, with the company firmly retaining its Top 5 position. APA Group ((APA)) also featured prominently, with its short position picking up 2.53ppt from 2.63% to 5.15%. Meanwhile, David Jones booked the biggest monthly increase amongst the retailers, rising 1.24ppt from 8.94% to 10.18%.

On the decrease side, St Barbara held the top spot, declining 2.25ppt to just 0.95% shorted, while Carsales also continued to improve in monthly terms, its short position pulling back 2.19ppt to 6.38%. Cochlear also posted a big decrease, its short position dropping 2.08ppt to 8.28%, helping it to drop a few spots on the Top 20 list.
 

Top 20 Largest Short Positions

Rank	Symbol	Short Position	Total Product	%Short
1	JBH	21085329	98850643	21.33
2	LYC	232609223	1716129131	13.55
3	FLT	13486212	100122666	13.47
4	ILU	48748219	418700517	11.64
5	FXJ	269604563	2351955725	11.46
6	MYR	60261579	583384551	10.33
7	TRS	2694736	26092220	10.33
8	DJS	50240318	528655600	9.50
9	CSR	46390275	506000315	9.17
10	HVN	95794578	1062316784	9.02
11	AWC	212836611	2440196187	8.72
12	COH	4872543	56972605	8.55
13	PDN	69575338	836825651	8.31
14	LNC	41555023	504487631	8.24
15	WTF	16724527	211736244	7.90
16	WSA	13656689	179735899	7.60
17	FMG	225149335	3113798659	7.23
18	SGT	10071876	145123714	6.94
19	CRZ	15329088	234896130	6.53
20	MSB	18443824	284478361	6.48

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.

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