The Short Report

This story features WHITEHAVEN COAL LIMITED, and other companies. For more info SHARE ANALYSIS: WHC

By Andrew Nelson

While brokers may have shifted into a higher gear as far as the upgrading and downgrading of stocks goes (see Monday’s Weekly Recommendation report), investors have moved the other way, slowing down both shorting and short covering on the Australian market. Just three stocks saw their short positions shift by more than once percentage point (ppt) over the week from the third to the tenth of April.

Overall, short positions were a bit higher following the steady pullback from 4.5-year highs on the S&P/ASX 200. CIMB reports the iron ore sector attracted most of the shorting. The steel and chemical sectors also saw short interest increase, while short interest in the discretionary retail sector remains high, although below the six month average.

Shorts in Whitehaven Coal ((WHC)) were up 1.01ppt from 6.8% to 7.81%. A number of brokers have downgraded their coal price assumption over the past few weeks, which caused Citi to actually downgrade its recommendation to Hold. Deutsche Bank’s thermal coal price forecasts and earnings forecasts were also lowered, the broker noted Whitehaven Coal faces numerous challenges to improve profitability and the spot price of coal is weakening, adding to margin pressure. Broker sentiment for the remains positive.

Shorts in SingTel ((SGT)) were 1.35ppt lower, going from 2.07% to 0.72%. BA-Merrill Lynch noted last month that SingTel has announced a strategic review for the Optus satellite business, with optimizing share holder value the stated goal. The broker points out this could end up turning into a 2%-6% special dividend if the holdings are sold down or listed. Sentiment for the stock is positive.

Former regular Lynas Corp ((LYC)) makes its way back into the Short Report after an absence, its short position pulling back 1.02ppt from 11.29% to 10.27% over the week. Deutsche Bank noted a few weeks ago that production at LAMP is going to plan and the risk/return ration now looks a fair bit more favourable. The broker is at Hold and said for it to shift to a positive stance a successful ramp-up to 11,000 tpa is needed as well as the rare earth pricing finding a floor. Also, upcoming Malaysian elections need to be out of the way. The latest legal appeal has also been dismissed and the broker believes the potential for more disruption is now greatly diminished. Sentiment for the stock is positive.

There wasn’t much more movement over the month to the tenth of April, but the key words here are “a bit”. Four stocks posted significant moves of 2ppt or more over the month, with more covering than shorting going on. The one stock that is up by 2ppt or more over the month was Atlas Iron ((AGO)). Shorts lifted by 2.37% over the period, going from 1.25% to 3.62%. The stock has been upgraded three times this month, with JP Morgan moving to Buy and both Deutsche Bank and Macquarie lifting to Neutral. UBS lifted to Buy back at the end of February as well. After all of the upgrades, sentiment is understandably positive.

Shorts in Gryphon Minerals ((GRY)) went the other way, dropping 3.27ppt from 6.74% to 3.47%. Citi confirmed its Buy call just yesterday and Credit Suisse a few weeks before, the latter noting the formal financing process for Banfora is continuing, with arrangements expected to be in place by the September quarter. Sentiment is perfect on straight Buys.

Shorts in Sundance Energy ((SEA)) were down 3.14ppt from 3.45% to 0.31%. CIMB noted last week the company is planning on growth via two streams: development and a higher risk drilling program through the rest of this year. 80% of capex is being directed towards development drilling and 20% on appraisal drilling. This mix has the broker thinking there is both better clarity and dependability about hitting the FY guidance range. Growth guidance over the next few years is otherwise strong, driven by a good management team and attractive acreage in diverse basins. Sentiment for the stock is perfect on straight Buys.

Our last move was booked by Bradken ((BKN)), with shorts down 2.02ppt from 6.58% to 4.56% over the course of the month. Towards the end of last month CIMB revised its forecasts to reflect a longer than expected recovery in demand from OEMs after taking note of some growing talk around the market. FY13-14 EPS was down by 4%-8% to10% below the market. The good news was that CIMB is starting to think that the recent period of aggressive consumables de-stocking and maintenance deferrals is now largely behind us. Still, the broker expects to see near term share price weakness as the other brokers come to the same conclusion about OEM demand and push through their own downgrades. Sentiment for the stock is positive.

There was very little in the way of change to the Top 20 Most Shorted list. Western Areas ((WSA)) moved from the fifteenth to the twentieth spot, while GUD Holding departed the list from the number 19 spot to be replaced by Whitehaven Coal ((WHC)) at number 16.
 

Top 20 Largest Short Positions

Rank	Symbol	Short Position	Total Product	%Short
1	JBH	18211628	98947309	18.41
2	FXJ	409549823	2351955725	17.41
3	ILU	66110671	418700517	15.79
4	MYR	78920011	583494551	13.53
5	PDN	113089472	837187808	13.51
6	MTS	99431542	880704786	11.29
7	FLT	11245391	100414455	11.20
8	LYC	205375510	1960801292	10.47
9	MND	9026077	90940258	9.93
10	DJS	52353940	531788775	9.84
11	CSR	49376276	506000315	9.76
12	TRS	2222293	26092220	8.52
13	KCN	12819421	151828173	8.44
14	HVN	88204113	1062316784	8.30
15	COH	4265441	57040932	7.48
16	WHC	76634442	1025635023	7.47
17	SGM	15154663	204309387	7.42
18	ANN	9412272	130818006	7.19
19	WTF	15179003	211736244	7.17
20	WSA	13606473	196843803	6.91

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.

Technical limitations

If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

Click to view our Glossary of Financial Terms