The Short Report

This story features APA GROUP, and other companies. For more info SHARE ANALYSIS: APA

By Chris Shaw

For the week from May 1, cuts in short positions outweighed increases in shorts by around double based on a one percentage point cut-off measure. The largest change for the week was in Whitehaven Coal ((WHC)), where shorts fell to 1.72% from 5.61% the week before.

The change came post a quarterly production report that resulted in some cuts to earnings estimates in the market but prior to the company announcing a $1.00 per share bid for Coalworks ((CWK)). Success in the acquisition would offer potential for synergies at the Vickery project.

APA ((APA)) saw short positions fall to 1.44% from 3.8% the week before, this as the market continues to factor in a potential acquisition of Hastings Diversified Utilities ((HDF)). While the ACCC has raised some concerns with respect to the proposed acquisition, APA has responded with some revised undertakings that Credit Suisse suggests increases the likelihood the proposal receives regulatory approval.

Shorts in SingTel ((SGT)) declined to 3.97% from 5.89% in the week from May 1 as the market adjusted positions leading into the full year result, which largely met broker expectations. Paladin Energy ((PDN)) also saw a decline in shorts of more than one percentage point to 7.12%, this post the announcement of a convertible bond issue that brokers viewed as reducing refinancing risks for the company.

Beach Energy ((BPT)) delivered a better than expected March quarter production report and early shale fraccing is showing some promise, the report being followed by shorts in the stock declining for the week to 2.16% from 3.22%.

In terms of increases in short positions for the week from May 1, the largest was in David Jones ((DJS)) where total shorts rose to 10.83% from 8.88%. The change came as the stock continues to underperform, down almost 40% over the past year. The increase in shorts came before the announcement of some head office changes that should deliver some cost savings going forward.

The lift in short positions for David Jones confirms the company's place among the top-20 short positions on the Australian market. This list continues to be dominated by consumer discretionary stocks as the top 20 includes the likes of JB Hi-Fi ((JBH)), Myer ((MYR)), Billabong ((BBG)), Carsales.com ((CRZ)), Flight Centre ((FLT)) and Harvey Norman ((HVN)).

Also in the top 20 are media plays Fairfax ((FXJ)) and Ten Network ((TEN)), resource stocks Paladin and Iluka ((ILU)) and industrials such as CSR ((CSR)) and Gunns ((GNS)).

In terms of monthly changes from April 5, the largest increase is in Spark Infrastructure ((SKI)), positions rising to 6.29% from 1.43% previously. The market remains unconvinced of the benefits of the proposed acquisition of the Sydney Water Desalination plant, as while the deal would be earnings accretive management have little experience in the business.

The other largest monthly increase was in Paladin, where shorts rose to 7.12% from 3.92%. The increase comes after the company completed a convertible note issue to alleviate some refinancing risks but doesn't address some operational issues the company is dealing with.

Largest declines in shorts for the month from April 5 were in Beach Energy and Carsales.com. While the move to acquire a stake in Torpedo7 in New Zealand raised some questions about strategy for Carsales.com, brokers continue to expect solid growth in online display ads.

Among other changes in short positions, RBS Australia notes shorts in Leighton Holdings ((LEI)) have risen to 3.1% from 2.3% prior to the company releasing revised earnings guidance. A major issue for the company in the view of RBS is the group's capital position as there remains risk with respect to the need for further cash requirements.

RBS suggests Leighton will continue to underperform both its peers and the market and the broker recommends reducing exposure to the group.

 

Top 20 Largest Short Positions

Rank	Symbol	Short Position	Total Product	%Short
1	JBH	22332469	98850643	22.60
2	ISO	733044	5703165	12.85
3	MYR	67399279	583384551	11.56
4	FXJ	271035010	2351955725	11.55
5	DJS	56939484	524940325	10.83
6	COH	6118023	56929432	10.73
7	FLT	10009250	100031742	9.99
8	LYC	164111757	1714496913	9.58
9	CRZ	21143568	233684223	9.03
10	BBG	22990501	257888239	8.91
11	EGP	59491110	688019737	8.64
12	HVN	85880186	1062316784	8.07
13	ILU	32518188	418700517	7.75
14	GNS	61449507	848401559	7.23
15	PDN	59608465	835645290	7.12
16	CSR	33703822	506000315	6.64
17	SKI	83340340	1326734264	6.29
18	WTF	13114831	211736244	6.19
19	TEN	64363201	1045236720	6.16
20	TRS	1578168	26071170	6.07

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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