The Short Report

This story features SILVER LAKE RESOURCES LIMITED, and other companies. For more info SHARE ANALYSIS: SLR

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By Andrew Nelson

The week from the 23rd to the 30th of January was a pretty quiet one as far as shorting activity on the Australian share market is concerned. There was just one significant move on a weekly basis and while the numbers are higher in terms of monthly moves, much of it is carryover from previous weeks.

The biggest weekly move was posted by Bathurst Resources ((BTU)), whose short position increased by 4.82 percentage points (ppt) from 10.1% to 12.05%. The stock still rates straight Buys in the FNArena Database, but brokers have turned a bit more cautious on estimates for first production from Escarpment, which means breakeven to negative results for FY13 and maybe FY14. Better coal prices would go a long way to improving the earnings picture, say brokers.

The biggest weekly move to the downside was a smaller 1.56ppt decline in short position booked by Ten Network ((TEN)), which saw its short position pull back from 5.7% to 4.14%. Sentiment is distinctly negative for the stock, with only one Buy call on show in the database. Credit Suisse moved to Buy back in December on hopes the capital raising would put debt concerns to bed. Otherwise, the database shows three Holds and four Sells, with most pessimistic about television ratings and thus earnings prospects.

There is a bit more to discuss on a monthly basis, with six increases greater than 2ppt and two more on the decrease side of the ledger. The biggest decline booked was 10.29ppt, which saw Silver Lake Resources ((SLR)) move from 10.63% to 0.34%. However, the numbers are exactly the same as last week, with the Integra Mining merger ((IGR)) put to bed a few weeks ago.

The only other decrease over 2ppt was enjoyed by JB HiFi ((JBH)), with its monthly decline a little bigger than it was last week. Shorts came off 2.2ppt from 20.18% to 17.98%. Sentiment still lies on the negative side, with brokers remaining a bit too wary to turn positive enough on equity markets to lift recommendations. The database shows six Holds and one Sell, with shares trading at a 17% premium to the current consensus price target.

Shorts in Paladin ((PDN)) are now up 4.44ppt on a monthly basis, rising from 8.02% to 12.46%. December quarter production was well received a couple of weeks back, but with the company transitioning from miner to developer, analysts are becoming increasingly sceptical from a risk perspective. Sentiment is still sitting in positive territory on two Buys, three Holds and a Sell, with a current 30% upside to the consensus price target.

Fairfax ((FXJ)) is up 3.06ppt from 12.68% to 15.74%. Sentiment remains slightly to the negative, with two Buys, three Holds and three Sells on show in the database. Shorts in Kingsgate ((KCN)) are up 2.71ppt from 4.25% to 6.96% after reporting a fairly weak quarter last week. Three Holds and one Sell are recorded in the database, with most brokers already concerned about FY prospects.

GUD Holdings ((GUD)) finds itself 2.47ppt more shorted, moving from 1.36% to 3.83%. Quarterly results came in a few weeks back and were fairly well received, except for weakness in the company’s key Sunbeam brand. The weakness in Sunbeam and the expectation of continuing headwinds keeps brokers neutral for the most part, with several of them also worried about their sustainability of the dividend.

It wouldn’t be a short report without Lynas Corp ((LYC)), or so it seems, with the company’s short position adding 2.29ppt from 5.99% to 8.28%. Sentiment is still positive on two Buys and two Holds and 36% upside to the consensus price target.

Our last mention is garnered by SMS Management & Technology ((SMX)), whose short position has increased by 2.01ppt from 1.46% to 3.47% on a monthly basis. There’s been plenty of broker chatter over the last week, with CIMB, UBS, Macquarie and Credit Suisse all concerned about weakening trends in the company’s end markets. Price target and earnings forecasts were cut and the company rates straight Holds in the database.

There were only a few minor changes to the Top 20 list over the course of the week. Despite the increase in Fairfax, it has dropped from second to fourth place. The opposite case was Kingsgate, which moved from the twentieth to seventeenth spot. Wotif.com ((WTF)) found itself off the list from the seventeen slot, which allowed Gunns ((GNS)) to join at nineteen.

Top 20 Largest Short Positions

Rank	Symbol	Short Position	Total Product	%Short
1	JBH	17532943	98850643	17.74
2	FXJ	371058882	2351955725	15.78
3	ILU	65793636	418700517	15.71
4	MYR	83812096	583384551	14.37
5	FLT	12379702	100165616	12.36
6	PDN	103027203	836825651	12.31
7	DJS	62699370	531788775	11.79
8	MTS	102616415	880704786	11.65
9	HVN	118749999	1062316784	11.18
10	TRS	2547411	26092220	9.76
11	CSR	42258997	506000315	8.35
12	LYC	154900655	1960801292	7.90
13	MND	7143478	90663543	7.88
14	COH	4323420	57026689	7.58
15	ACR	12462624	166496711	7.49
16	AWC	169866052	2440196187	6.96
17	KCN	10532565	151828173	6.94
18	BKN	11150108	169240662	6.59
19	GNS	51528090	848401559	6.07
20	WSA	11701581	196843803	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.

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