The Short Report

This story features NEXTDC LIMITED, and other companies. For more info SHARE ANALYSIS: NXT

The company is included in ASX100, ASX200, ASX300, ALL-ORDS and ALL-TECH

Guide:

The Short Report draws upon data provided by the Australian Securities & Investment Commission (ASIC) to highlight significant weekly and monthly moves in short positions registered on stocks listed on the Australian Securities Exchange (ASX).

Please take note of the Important Information provided at the end of this report. Percentage amounts in this report refer to percentage of ordinary shares on issue.

Summary:

Period: Week to, and month to, August 29, 2013

Result season dominated shorting activity last week, and is is no surprise weekly decreases of more than one percentage point outnumber weekly increases by nine to one. Literally. Stocks in question were either bought post result (whether on the result itself or on FY14 guidance), prompting short-covering, or sold, prompting short-side profit-taking. Consumer stocks such as JB Hi-Fi and Flight Centre surprised with great results and saw sharp covering (JBH has plunged down the Top 20), while gold miners and gold mining service providers saw a reaction to oversold positions and gold price volatility, with Ausdrill a case in point.

The numbers look different on a monthly basis with many familiar stocks still featuring. There were ten monthly increases of two percantage points or more last week to only five decreases. Shorters are circling the department stores again. along with the likes of Kingsgate, which is battling high gearing, Cabcharge, which is under attack from government reforms, and Cochlear, which is facing stiff competition. The shorters continue to scoff at UGL's demerger proposal and were not swayed by GUD's special dividend.

Weekly Short Increases

Shorts in Galaxy Resources ((GXY)) increased to 2.33% from 0.81%

Galaxy offered a rights issue last month to raise capital and the increase in shorts likely reflects an arbitrage play on that issue. GXY is not covered by FNArena brokers.

Weekly Short Decreases

Shorts in NextDC ((NXT)) decreased to 2.13% from 4.22%

NextDC posted a substantial beat at its result on strong data centre demand, prompting brokers who had not updated target prices since the interim release to increase by a net 44%, and no doubt forcing some short-covering.

Shorts in St Barbara ((SBM)) decreased to 2.42% from 4.39%

St Barbara posted a weak result suggesting gold mining underperformance, but is highly leveraged to the gold price and the gold price has shot up over the period. Hence a reduction in shorts likely reflects short-covering.

Shorts in Flight Centre ((FLT)) decreased to 7.11% from 8.97%

It doesn’t matter how often analysts warn that Flight Centre is getting too pricey, the company just keeps knockin em for dead. The same was true of FLT’s FY13 result, leaving analysts again shaking their heads in awe and shorters scrambling for cover. FLT has dropped out of the Top 20 most shorted.

Shorts in iiNet ((IIN)) decreased to 0.91% from 2.38%

iiNet’s FY13 result was in line with expectations but brokers took the opportunity to increase growth forecasts to account for the much applauded Adam Telecom acquisition. The market must have been expecting a beat, because IIN took a dive thereafter and it seems the shorters took profits on the plunge.

Shorts in JB Hi-Fi ((JBH)) decreased to 9.13% from 10.40%

No one can deny how weak Australian consumer discretionary spending is right now, and JBH has been hanging round for months at the top of the most shorted list. But the company refuses to lay down and die and posted a beat for its FY13 result. The shorters bailed and JBH has now plunged to number 14 in the Top 20.

Shorts in Ausdrill ((ASL)) decreased to 5.11% from 6.24%

Ausdrill is not a stock one wanted to be short on this past couple of weeks. ASL’s result was nothing flash and its outlook probably less so but as service provider to gold miners, ASL has been double-trashed of late. A bounce in the gold price and a realisation the company still produces decent cashflows has prompted a 125% stock price bounce and some badly bitten short-side players.

Shorts in Perseus Mining ((PRU)) decreased to 2.10% from 3.19%

Perseus’ result was released after the period in question and although mixed, analysts are expecting more consistent production from Edikan in FY14. PRU shares drifted lower over the period ahead of the result and the shorters perhaps took the chance to square up.

Shorts in Steadfast Group ((SDF)) decreased to 0.02% from 1.04%

Steadfast only listed in early August and what was probably an IPO play appears now to have run its course.

Shorts in Iluka Resources ((ILU)) decreased to 8.38% from 9.39%

Iluka has been hanging around in the Top 20 for a while now and is a stock highly sensitive to both China and the Aussie. This means volatility, and ILU has remained volatile even after an in-line result upon which analysts declared greater confidence in zircon prices. A slight reduction but ILU remains at number 17, down from 15 last week.

Monthly Short Increases

Shorts in The Reject Shop ((TRS)) increased to 6.45% from 1.84%

The consumer discretionary sector offers up some of the most shorted stocks in the market, and not even this “Two Dollar Shop” chain is immune, although it doesn’t make the Top 20. TRS reported a miss during the period and despite positive analyst views on increased store roll-outs, the shorters are circling.

Shorts in GUD Holdings increased to 8.32% from 4.38%

GUD posted its result in late July which prompted three downgrades from FNArena brokers, all to Sell. FY14 guidance was weak although the company did offer up a special dividend, which sparked a bounce in share price. The shorters salivated.

Shorts in Cabcharge ((CAB)) increased to 10.17% from 6.59%

Cabcharge’s result was nothing flash but from a shorters perspective, a short play on CAB reflects more of a structural position, one might assume, based on how the company will survive ongoing state reforms of the taxi industry. CAB sits at number 10 in the Top 20.

Shorts in David Jones ((DJS)) increased to 11.38% from 8.34%

The latest retail sales data show department stores as the worst performers and the GDP break-down shows consumer spending at its lowest level since the GFC aftermath. These releases were this week, and not within the period in question, but both department stores will report their results later this month and DJS sits at 5 in the Top 20 with rival Myer at 2. The shorters have been a bit burnt of late but now are circling for the kill.

Shorts in Myer ((MYR)) increased to 14.20% from 11.29%

See David Jones (above).

Shorts in Kingsgate Consolidated ((KCN)) increased to 9.56% from 6.82%

Kingsgate guided to no growth in production in FY14 and the company’s debt is increasing in low gold price environment. Three FNArena database broker cover KCN and they all have Sell ratings post the FY13 result. Fodder for shorters.

Shorts in eServGlobal ((ESV)) increased to 2.91% from 0.18%

ESV is not covered by FNArena database brokers.

Shorts in Cochlear ((COH)) increased to 10.99% from 8.33%

Cochlear has retained its Top 20 spot at number 6 this week with the ongoing story being one of mounting competition in the global hearing device space and a lot at stake from COH’s new N6 product following the costly recall of the N5.

Shorts in UGL ((UGL)) increased to 12.10% from 9.67%

UGL moved from 12 to 5 in the Top 20 last week and is up to 4 this week, with a demerger on the cards which, unlike most demerger proposals, has not gained much in the way of approval from analysts.

Shorts in Monadelphous ((MND)) increased to 13.08% from 10.84%

Mona reported its result in the period and despite missing expectations and prompting target price downgrades from brokers, it still posted record earnings. The issue is with the future not with the past, but yet the market jumped in and bought the stock. Clearly it was not a short-covering rally. Mona retains its spot at number 3 most shorted.

Monthly Short Decreases

Shorts in JB Hi-Fi decreased to 9.13% from 16.23%

See above.

Shorts in Paladin Energy ((PDN)) decreased to 7.20% from 13.12%

Paladin will continue to make its way out of the monthly list now the capital raising arbitrage play is over, unless there is a new development.

Shorts in Flight Centre decreased to 7.11% from 12.07%

See above.

Shorts in St Barbara decreased to 2.42% from 5.32%

See above.

Shorts in Buru Energy ((BRU)) decreased to 3.81% from 5.98%

Buru is making its way down the monthly list now that the company’s refinancing deal is complete.

Shorts in Perseus Mining decreased to 2.10% from 4.12%

See above.

Top 20 Largest Short Positions

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