The Short Report

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

By Andrew Nelson

The week from the eighteenth to the twenty fifth of March was a slow one as far as shorting and short covering on the Australian market went. There was a bit more action when looking over the month to the twenty fifth, but most of that was on the back of moves from weeks past.

Just one stock saw its short position move up or down by one percentage point (ppt) or more and that was Atlas Iron ((AGO)). Shorts increased by 1.17ppt from 1.81% to 2.96% over the week. Credit Suisse upgraded its call to Buy from Sell in mid-March. Other than that, sentiment remains slightly positive, the same as it was at the end of February when the company reported what were fairly disappointing first half numbers.

Atlas also sits atop the monthly increase list, with shorts up 2.44ppt from 0.54% to 2.96%. Next comes UGL ((UGL)) it’s shorts up 2.29ppt from 3.74% to 6.03%. The company said last week it was undertaking a review of its corporate structure and is only part way through a cost cutting program. Analysts speculate this could mean a restructure or a de-merger is on the cards. The FNArena Sentiment Indicator is positive.

Shorts in Transfield Services ((TSE)) are up 2.19ppt from 1% to 3.19%. The company reported interim results at the end of February that came in a bit short of most brokers. Sentiment for the stock remains neutral on five Holds in the FNArena Database, with brokers torn between longer term value and a difficult outlook nearer term.

Our last 2ppt or move increase over the month was posted by Iluka ((ILU)), with shorts up 2.07ppt from 14.07% to 16.14%. JP Morgan noted at the beginning of March that despite the near term woes of poor pricing conditions it still sees upside, noting a number of industry participants are talking up improving market conditions. The broker thinks as soon as we see some evidence of a pickup in zircon prices, short-covering in the stock will start to accelerate. Sentiment for the stock remains positive in the meantime.

SingTel ((SGT)) continued on with its short-covering march in March, its shorts coming off 5.8ppt from 5.51% to 0.71%. BA-Merrill Lynch noted a few weeks back that the company had announced a strategic review for Optus's satellite business, with optimising share holder value the stated goal. BA-Merrill Lynch pointed out this could end up turning into a 2%-6% special dividend if the holdings are sold down or listed. Sentiment for the stock remains in positive territory.

Gryphon Minerals ((GRY)) has seen its short position pull back by 3.45ppt from 6.61% to 3.16% over the month in question. Both CIMB and Credit Suisse noted in mid-March that despite a sub-par interim report, Banfora remains on track and that’s where the value is. Sentiment is perfect on straight Buys in the FNArena Database.

Sundance Energy ((SEA)) comes next, with shorts down 3.07ppt from 3.44% to 0.37%. BA-Merrill Lynch lifted its price target mid-March after the company's acquisition of 7,812 acres in the volatile oil area of the Eagle Ford. The broker said this asset will now become core to Sundance's ramping up of production to 5,000 boepd over the next 15 months. The broker believes the asset has significant upside potential and was secured on attractive terms. Sentiment is positive.

Our last short position shift of note was posted by Boral ((BLD)), with shorts down 2.07ppt from 4.79% to 2.72% over the month in question. Deutsche Bank noted earlier in March that the company plans to combine its Boral Construction Materials and Cement divisions into one, vertically integrated unit. Information on cost savings and synergies wasn't provided at the time, but Deutsche reckons we'll see savings in excess of the $105m already announced. Sentiment is positive.

Despite the slow week in terms of the magnitude of short position changes, there was quite a bit of a change to the Top 20 Most shorted list. David Jones ((DJS)) moved from twelve to seven on the list, Harvey Norman ((HVN)) from eleven to fourteen and Cochlear ((COH)) from fifteenth to eighteenth position. There was also a bit of compositional change, with both Western Areas ((WSA)) and Sims Metal ((SGM)) falling off the list, with Cochlear ((COH)) and The Reject Shop ((TRS)) joining at eighteen and thirteen respectively.
 

Top 20 Largest Short Positions

Rank	Symbol	Short Position	Total Product	%Short
1	JBH	17699183	98947309	17.89
2	FXJ	403719024	2351955725	17.17
3	ILU	68321806	418700517	16.32
4	PDN	105324703	836969286	12.58
5	MYR	72784154	583384551	12.48
6	MTS	101791942	880704786	11.56
7	DJS	58015876	531788775	10.91
8	FLT	10575169	100344792	10.54
9	LYC	198939672	1960801292	10.15
10	CSR	49236177	506000315	9.73
11	MND	8496010	90940258	9.34
12	KCN	13628913	151828173	8.98
13	TRS	2291301	26092220	8.78
14	HVN	88172707	1062316784	8.30
15	BKN	13172590	168176418	7.83
16	WSA	14571789	196843803	7.40
17	WTF	14886185	211736244	7.03
18	COH	3909294	57040932	6.85
19	BRU	18707916	273912685	6.83
20	ACR	11243008	166521711	6.75

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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