The Short Report

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

By Andrew Nelson

Just three stocks saw their short position shift up or down by more than one percentage point over the week from the sixteenth to the twenty third of April and all of them were increases. While there were quite a few more significant moves over the past month, but they were more to do with a continuation of recent trends than what transpired over the past week or so.

CIMB, where analysts also keep a close watch on what's happening with short positions in Australia, reports shorts have increased in the iron ore sector, while the capital goods and chemicals sectors also attracted some fresh interest.

NRW Holdings ((NWH)) saw its short position rise 1.3ppt from 5.32% to 6.62%. Macquarie reported last week the company had won a $6 million contract at Roy Hill and suggested an early win on a project such as this could signal more work down the track. On the other hand, the broker said that volatility in the share price is likely to continue until the iron ore market outlook stabilizes, which should be over the next twelve months. The Sentiment Indicator in the FNArena Database shows the stock enjoys positive broker sentiment.

Myer ((MYR)) finds itself next on the list, with shorts rising 1.2ppt from 13.96ppt to 15.15ppt. Deutsche Bank upgraded its call to Buy at the end of March, noting the market still wanted to buy discretionary retailers and Myer represents the best opportunity in the space given a reasonable valuation and strong free cash flow. The problem for Myer is a week prior to the upgrade both Citi and BA-Merrill Lynch cut to Sell and UBS and Credit Suisse downgraded to Hold. UBS’s reaction sums it up well, as while the broker thought Myer offers about the best leverage around to a macro recovery, the stock has also outperformed the ASX/200 by some 27% over the quarter.  Broker sentiment is negative for the stock.

Our last weekly short position increase was booked by White Energy ((WEC)), with shorts up 1.12ppt from 0.08% to 1.2%.

There are a few more stocks to discuss over a monthly timeframe, with nine changes to short position greater than 2ppt. Six were increases and three were decreases. The biggest increase was posted by abovementioned NRW Holdings, with shorts up 3.88ppt from 2.74% 6.62%.

Shorts in Whitehaven Coal ((WHC)) advanced 3.67ppt from 5.91% to 9.58%. Citi downgraded its recommendation on the stock to Hold from Buy a couple weeks back after downgrading copper, aluminium, coal and gold price forecasts by anywhere from 5% to 15%. For WHC this added up to lower forecasts on the back of reduced coal price assumptions, which saw the price target trimmed on the lower earnings. CIMB downgraded to Hold at the end of last month, having cited the ongoing run of operating issues, little in the way of clear information and the fact that first coal from Maules Creek had been pushed back to 2015. Sentiment for the stock is positive.

Troy Resources ((TRY)) was the next most shorted stock over the month, up 2.88ppt from 0.09% to 2.97%, a slight increase over last week’s monthly read. Following next is Myer, its jump in weekly position adding up to a 2.68ppt increase over the month from 12.48% to 15.16%.

Shorts SAI Global ((SAI)) were 2.5ppt higher from 3.7% to 6.2% over the month. JP Morgan, for one, is cautious on the stock, having noted the regular occurrence of downgrades to guidance in the recent past. Sentiment for the stock is positive.

Our last significant increase was posted by Ansell ((ANN)), shorts up 2.04ppt from 6.16% to 8.2%. Sentiment for the stock is negative, with BA-Merrill Lynch saying last month it doesn’t expect the company to reach its FY targets.

That leaves of with three stocks that saw their short positions pull back over the course of the month to the twenty third of April. The list kicks off with Bradken ((BKN)), whose shorts have come off 3.74ppt from 7.83% to 4.09%. Macquarie said last week that despite the softening outlook, Bradken is inexpensive versus its peers given a sustainable dividend yield of around 8% and the strong cash generation in the business. Sentiment for the stock is positive.

Shorts in Slater & Gordon ((SGH)) were down 2.83ppt from 2.83% to 0%. Sentiment for the stock is neutral. Our last mention is Iluka ((ILU)), its short position pulling back 2.19ppt from 16.32% to 14.13%. Last week was a busy one for the stock, with brokers pouring over March quarter numbers. The consensus judgment was positive, with comments from BA-Merrill Lynch summing up the situation well. The broker noted March quarter production numbers were in line, with sales revenue especially pleasing given the prevailing weak conditions. There was no pricing update, but the broker assumed the market believes that prices have stabilised. Zircon demand is starting to turn positive and the broker expected titanium prices will also soon turn. Sentiment for the stock is positive.

The top 20 most shorted list looks pretty similar to last week’s list. There were a few minor position changes and two changes in composition. Sims Metal Management ((SGM)) and GUD Holdings ((GUD)) both departed the list from the number nineteen and twenty spots, with Cochlear ((COH)) joining at nineteen and Cabcharge ((CAB)) at twenty.

 

Top 20 Largest Short Positions

Rank	Symbol	Short Position	Total Product	%Short
1	JBH	17930484	98947309	18.12
2	FXJ	396610835	2351955725	16.86
3	MYR	85398437	583594551	14.63
4	ILU	59274380	418700517	14.16
5	PDN	111287437	837187808	13.29
6	FLT	11670580	100414455	11.62
7	MND	9887746	90940258	10.87
8	MTS	94274942	880704786	10.70
9	LYC	205969965	1960801292	10.50
10	DJS	54864578	531788775	10.32
11	CSR	49228210	506000315	9.73
12	WHC	96220366	1025635023	9.38
13	TRS	2229204	26092220	8.54
14	HVN	87350503	1062316784	8.22
15	WSA	16141835	196843803	8.20
16	KCN	12436677	152191905	8.17
17	ANN	10288983	130841339	7.86
18	WTF	15574963	211736244	7.36
19	COH	4072927	57040932	7.14
20	CAB	8534221	120430683	7.09

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