The Short Report

This story features ANDEAN SILVER LIMITED, and other companies. For more info SHARE ANALYSIS: ASL

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By Andrew Nelson

Despite short interest on the Australian Stock Exchange remaining fairly high across the market, short selling and covering activity was fairly muted over the week to 3 October 2012. There were just three significant decreases in short positions booked over the week, with only two significant increases recorded.

Much like last week’s report, we’ve again stretched our definition of “significant” to include moves of one percentage point or more compared to our more usual two percentage points or more.

This week we’ll start with the stocks on the way down. Shares in Wotif.com ((WTF)) booked the largest decrease in short position, down 1.78ppt from 8.38% to 6.6%. During the week in question, BA-Merrill Lynch put out a note questioning the company’s future ability to grow sales and earnings given a prolonged period of underinvestment in sales, marketing and technology. This is a fairly consistent concern noted by brokers across the FNArena Database, with the sentiment read on the stock marching steadily backward over the last few months. It’s also worth noting that CEO Robbie Cooke resigned three weeks back and this would no doubt be affecting current sentiment. In fact, UBS downgraded to Hold on the news back on the 19^th of September. The stock is now negatively regarded in the FNArena Database, with two Sells, four Holds and just one Buy.

Shares in Linc Energy ((LNC)) were 1.75ppt less shorted by the end of the weekly period, going from 6.75% to 5%. The move was enough to see the stock fall off the Top 20 most shorted leader board. There was no broker commentary over the period, or in fact in for quite a few months. The AGM was last week, however, and the news of a minor win (after the week to 3 Oct.), with the U.S. Bureau of Land Management extending Linc’s Alaskan lease at Umiat has provided some impetus. The company is set to kick off some major exploration there in the months ahead.

David Jones ((DJS)), normally on the up-side of the ledger, saw its short position pullback 1.14ppt over the week from 10.30% to 9.6%. The shares are negatively regarded on the FNArena Database, showing three Sells, four Holds and just one Buy from Macquarie. Most brokers are negative on the stock given the macro outlook, although Deutsche Bank thinks costs are running high enough that even a pick-up in sales will offer little help. On the other side of the equation, Macquarie sees a slight uplift in retail sales trends in the months ahead and thinks David Jones, given its distinct differentiation, will be able to take advantage.

Switching to the other side of the table, Ausdrill ((ASL)) booked the biggest increase in short position, up 2.38ppt from 1.48% to 3.86%.  The company was able to refinance a big chunk of debt a few days back and while not relevant to moves before Oct. 3, it’s worth noting analysts from Deutsche Bank really liked that news and the removal of funding concerns. Brokers have otherwise been silent on the company since mid-August when the FY result garnered mixed reviews. Mixed is probably too kind a word, as both BA-Merrill Lynch and Macquarie downgraded their recommendations post the result.

Fairfax ((FXJ)) saw its short position increase by 1.46ppt from 11.54% to 13%. The stock remains Neutrally regarded in the FNArena Database, with three Buys, three Sells and a pair of Holds. No one’s said much since the FY result at the end of August, although most note the company’s prospects are ultimately tied to the macro outlook and that sure isn’t improving very quickly.

The ever popular retail ain’t no good until a macro recovery theme is still ever present, with both Myer ((MYR)) and JB HiFi ((JBH)) finding themselves the next two contestants on the short increase list. While the increase in neither is “significant” in terms of our aforementioned guideline, they are significant in that two of the four biggest short position increases were booked by big-name discretionary retailers. Shorts in Myer were up 0.94pptm from 11.03% to 11.97%, while JB HiFi increased 0.72ppt from 21.7% to 22.48%, cementing its hold as the most shorted stock on the Australian market. Both stocks are hovering near Neutral in the FNArena database, with Myer’s FY results in the middle of September not seeing any changes to recommendations.

Changes to the Top 20 list were extremely limited, with only a few minor position changes and just one stock leaving and one joining the list. Linc Energy said goodbye to its number 17 spot after booking its 1.75ppt decrease, while Mesoblast ((MSB)) moved on to the list at the number 18 spot.

Taking a look at the monthly moves, we’ll switch “significant” back to 2% or greater and note Ausdrill not only booked the biggest weekly increase, but it has also recorded the largest short position increase in monthly terms as well. Shorts increased by 3.03ppt from 0.83% to 3.86%.

Much like the weekly rundown, Fairfax and JB HiFi were next on the monthly increase list, with short position rising by 2.47 and 2.41 respectively.

The last significant monthly increase was posted by Lynas Corp ((LYC)), who has found itself becoming a regular feature on the Top 20 most shorted list. Over the monthly period, shorts in Lynas ticked up another 2.26ppt from 11.27 to 13.53%. UBS downgraded its call to Hold on Lynas last week on a weakening outlook for the rare earths market.We’ll also give a shout out to Iluka ((ILU)), another Top 20 regular. Shorts in Iluka climbed another 1.94ppt from 9.94% to 11.88% over the month.

Linc Energy was also number one on the monthly decreases list, its short position pulling back 3.88ppt from 8.88% to 5% in monthly terms. St Barbara Mining ((SBM)) ensured it remained in the short report after some big moves both up and down over the past few months. Shares in the junior gold miner were 3.09ppt less shorted, improving from 4.16% to 1.07%.

Analysts from RBS have singled out Goodman Fielder ((GFF)), noting that over the past two months short interest has decreased from 2.2% to be 1.4%. The broker believes the company’s current transformation plan is starting to gain some traction and this is inspiring a little more optimism in the stock. The broker believes the combination of a the $165m Integro sale, positive 2H earnings momentum and improved balance sheet via asset sales will end up seeing the reinstatement of a dividend by February 2013.
 

Top 20 Largest Short Positions

Rank	Symbol	Short Position	Total Product	%Short
1	JBH	22036611	98850643	22.29
2	FLT	13391277	100149257	13.37
3	LYC	229289910	1716159363	13.36
4	FXJ	301971566	2351955725	12.84
5	MYR	69739089	583384551	11.95
6	ILU	49731518	418700517	11.88
7	TRS	2616255	26092220	10.03
8	DJS	52440575	528655600	9.92
9	AWC	218589347	2440196187	8.96
10	HVN	94306955	1062316784	8.88
11	CSR	44127036	506000315	8.72
12	COH	4740661	56972605	8.32
13	PDN	67671955	836825651	8.09
14	SGT	10135917	145123714	6.98
15	FMG	213791664	3113798659	6.87
16	WSA	12062113	179735899	6.71
17	WTF	14179480	211736244	6.70
18	MSB	18273497	284478361	6.42
19	TEN	91677591	1437204873	6.38
20	CRZ	14791647	235089159	6.29

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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