The Short Report

This story features MATRIX COMPOSITES & ENGINEERING LIMITED, and other companies. For more info SHARE ANALYSIS: MCE

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By Andrew Nelson

There were only a few significant increases and decreases to short positions over the course of the week from 3-10 October.  Meanwhile, short interest on the Australian Stock Exchange remains fairly high across the market, although the level has been flat for the past month at 2.47%.

Significant increases and decreases were even over the period, with just three stocks increasing their short position by more than 1 percentage point and three stocks decreasing by at least that much.

The biggest move was a 3.1ppt increase booked by Matrix Composites & Engineering ((MCE)), the short position for which was up from 1.14% to 4.24% over the period. The FNArena Database yields nothing in terms of recent broker commentary. The company hosted its AGM towards the end of September and the company’s largest shareholder increased its stake by a few percent last week. The stock is covered by one broker in the FNArena Database, JP Morgan, and it maintains a Hold call on the stock, troubled by sluggish production rates.

Takeover target Northern Iron ((NFE)) was next on the list, seeing its short position increase by 2.43ppt from 0.15% to 2.18%. It’s been a tough few months for the company, which last month was forced to suspended its exploration programme and lay off some staff to deal with the low iron ore price. The company also reported towards the end of September that production performance during the first half of September had been impacted by a number of unplanned maintenance outages and operational events. Indian conglomerate Aditya Birla remains in the takeover hunt, although its $1.40 a share offer back in July has so far gained little traction. In the FNArena Database, only Macquarie provides coverage and its call is at Hold and has been since the company’s interim report in August, where the broker noted concerns about falling iron ore prices.

Our next contestant is another iron or play. Mt. Gibson ((MGX)) saw its short position grow by 1.15ppt from 0.26% to 1.41%. The stock maintains a positive rating in the FNArena Database, with four Buys, three Holds and one Sell. The current FNArena broker consensus target price shows more than 65% upside from current levels.

The largest short position decline over the period was recorded by Ausdrill ((ADL)). Shorts pulled back 2.21ppt from 3.86% to 1.65%, with little of note in the way of broker commentary in the past month. Deutsche Bank did confirm its Buy call in early September on news the company had secured a new $550m debt facility, which it thought would go a long way in alleviating funding concerns. The stock is positively regarded by brokers for the most part, with the FNArena Database showing five Buys versus one Hold and a Sell. There is currently 55% upside to the current consensus target price.

Next on the list is Carsales.com ((CRZ)), with its short position declining 1.09ppt from 6.06% to 4.97%, enough to see the stock drop of the Top 20 most shorted list. It joined the list at number 20 last week. The stock remains just on the sunny side of positive, with one Buy and five Holds.

Arrium ((ARI)) is next, with its short position subsiding from 1.67% to 0.61%. On the 10^th of October, the beginning of our week in question, Deutsche Bank was positive on the company’s sale of its 50.3% stake in Steel and Tube Holdings, noting the company will pocket about $73m from the deal. On the same day, Credit Suisse was positive on the development work at Peculiar Knob, while Macquarie liked news of a production upgrade and lifted its forecast in response. Seems the 10^th was a busy day for Arrium. The stock is positively regarded in the FNArena Database, with four Buys and two Holds. Just so you know, Deutsche has one of the Holds, while both Credit Suisse and Macquarie are at Buy.

Amendments to the Top 20 list were extremely limited, with only a few minor position changes and just one stock entering the list and one leaving. We’ve already covered the departure of Carsales, but also note that neutrally regarded APA Group ((APA)) joined the list at the number 17 spot. There was no broker commentary on APA over the period, but just after, Credit Suisse came off restriction and resumed coverage with a Hold, believing the stock is fully valued at current levels while otherwise not seeing very much near term upside.

Switching over to monthly moves and surprise, surprise, Matrix Composites & Engineering is also at the top of that list because of its big weekly move covered above. Skipping to third on the list we see Northern Iron, much like Matrix, a victim of last week’s increase.

The second biggest monthly short position increase was recorded by Myer ((MYR)), up 2.84ppt from 10.04% to 12.88%.  There isn’t any significant news to report that hasn’t already been covered over the last few issues of this report, so suffice it to say that Myer, along with the majority of its fellow discretionary retailers, continues to suffer from softening retail conditions and wavering investors spooked by said conditions.

Silver Lake Resources ((SLR)) again finds itself in the Short Report spotlight, with its short position up by 2.35ppt from 3.88% to 6.23%. Just a little bit higher and we’ll see Silver Lake join us on the Top 20 list. JP Morgan is still at Buy on the stock, but its concerns about bedding down the Integra acquisition and the extraction of synergies are obviously being more keenly felt by the market.

We’ll also shout out to Fairfax ((FXJ)), with its short position up 2.18ppt from 11.4% to 13.58% on a monthly basis. The week also saw Fairfax move up from four to three on the Top 20 list.

Linc Energy ((LNC)) posted the biggest monthly decline, down a whopping 4.54ppt from 8.62% to 4.08%. Carsales’ weekly effort mentioned above put it in the number two spot, its short position pulling back 2.56ppt from 7.53% to 4.97%. And last but not least, we’ve got short report favorite St Barbara ((SBM)), with its short position dropping 2.37ppt from 3.88% to 1.51% on a monthly basis.

Lastly, RBS notes short interest in SAI Global ((SAI)) has been building over the past couple of months, basically since the FY12 result. Over that period, shorts have risen from 1.0% to 2.2, with RBS seeing risk to growth in the company’s Compliance Services division.

The broker is also troubled by the fact that despite a lacklustre track record and ongoing risks, the stock continues to trade at above market multiples. RBS believes the premium will be quickly wiped away if a fourth earnings downgrade occurs. 
 

Top 20 Largest Short Positions

Rank	Symbol	Short Position	Total Product	%Short
1	JBH	22058606	98850643	22.32
2	LYC	233910058	1716159363	13.63
3	FXJ	315820820	2351955725	13.43
4	FLT	13336613	100149257	13.32
5	MYR	72831583	583384551	12.48
6	ILU	48758674	418700517	11.65
7	TRS	2637741	26092220	10.11
8	HVN	95473246	1062316784	8.99
9	AWC	218440435	2440196187	8.95
10	DJS	47226011	528655600	8.93
11	CSR	45143313	506000315	8.92
12	PDN	69200599	836825651	8.27
13	COH	4691744	56972605	8.24
14	FMG	221467647	3113798659	7.11
15	SGT	10008034	140842714	7.11
16	WSA	12731098	179735899	7.08
17	APA	44158013	651633068	6.78
18	WTF	13898463	211736244	6.56
19	TEN	93945041	1437204873	6.54
20	MSB	18294357	284478361	6.43

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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