The Short Report

This story features BEACH ENERGY LIMITED, and other companies. For more info SHARE ANALYSIS: BPT

Guide:

The Short Report draws upon data provided by the Australian Securities & Investment Commission (ASIC) to highlight significant weekly moves in short positions registered on stocks listed on the Australian Securities Exchange (ASX). Short positions in exchange-traded funds (ETF) and non-ordinary shares are not included. Short positions below 5% are not included in the table below but may be noted in the accompanying text if deemed significant.

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.

Stock codes highlighted in green have seen their short positions reduce in the week by an amount sufficient to move them into a lower percentage bracket. Stocks highlighted in red have seen their short positions increase in the week by an amount sufficient to move them into a higher percentage bracket. Moves in excess of one percentage point or more are discussed in the Movers & Shakers report below.

Summary:

Week ending November 5, 2015.

Last week saw the ASX200 continue a choppy trajectory southward, finally breaching previous support at 5200 and dropping to as low as 5050. Disappointing bank results and further falls in commodity prices were the main drivers.

In last week’s Report I noted a shock profit warning from Dick Smith did not prompt shorts into taking profits despite a 30% share price plunge but did encourage some further shorting of peer JB Hi-Fi. Well it seems it was just a matter of timing, with Dick Smith shorts falling last week by over three percentage points while JB Hi-Fi gained another percentage point, perhaps suggesting a switch to between electronics retailers.

Drillsearch ((DLS)) flew off our 5% plus table last week following an announced merger with Beach Energy ((BPT)) and this week it was the turn of Cardno to disappear in the wake of private equity moving to a 40% stake in the company.

Top of the table perennials Metcash ((MTS)) and Myer ((MYR)) saw notable short increases last week which simply put more daylight between third spot, but the old world theme for Myer and the competition theme for Metcash have been covered extensively in this Report previously so there’s no point in flogging dead horses.

 We may nevertheless take note that a small increase in shorts took Nine Entertainment ((NEC)) into the 10% plus club last week for the first time. Did someone say “old world”?
 

Weekly short positions as a percentage of market cap:

10%+

MTS    23.3
MYR   20.8
MND   16.3
SGH    15.9
ORI     14.3
FLT     13.8
MIN    13.7
JBH     13.6
PRY    13.0
CAB    12.7
AWE   12.3
GEM   12.0
DSH    11.6
GXL    11.0
WOR   10.8
SEK    10.2
NEC    10.0
SUL    10.0

In: SEK, NEC

9.0-9.9%

AWC, WSA, MRM, IVC, WOW
 
In: IVC                       Out: SEK, NEC

8.0-8.9%

ARI, STO, FMG

Out: IVC, CDD, MGX, UGL, VOC

7.0-7.9%

UGL, VOC, MSB, RFG, ALQ, WHC, SPO, MGX, KAR, NVT, PDN

In: UGL, VOC, MGX, NVT 

6.0-6.9%

TFC, NWH, BOQ, BKN, SVW, AAC

In: AAC, SVW                       Out: NVT, KCN

5.0-5.9%

IFL, GWA, CAR, SXY, TEN, SWM, ILU, NXT, SYR, SGM, KCN, NWS, ORE, IMF, SGN, IMF

In: KCN                      Out: SVW, AAC, VRT

Movers and Shakers

It was delayed reaction, but following a stark profit warning and 30% share price plunge for Dick Smith ((DSH)) two weeks ago, last week saw shorters finally take some profits. Dick Smith shorts fell 3.3 percentage points to 11.6% from 14.9%.

It appears as if some of that position against electronic retailers was shifted into rival JB Hi-Fi ((JBH)), given JB shorts saw another lift last week, by 1.1ppt to 13.6% from 12.5%.

If there’s one thing that will scare shorters into bailing out of positions, it’s M&A. Two weeks ago saw significant short-covering in Drillsearch following the announced merger with Beach Energy and now infrastructure and environmental services provider Cardno ((CDD)) has seen a big stake taken in its register by private equity.

It was not long ago Cardno was a regular member of the 10% elite club, along with longstanding E&C peers such as Monadelphous ((MND)) and MMA Offshore ((MRM)), but last week saw Cardno disappear off our 5% plus table from 8.6% the week before.

We might note that once high-flying MMA Offshore yesterday issued a profit warning, prompting speculation debt covenants may be breached if assets can’t be sold.

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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