The Short Report

This story features CSR LIMITED. For more info SHARE ANALYSIS: CSR

By Chris Shaw

The largest changes in short positions for the week from July 10 involved companies both in and out of the top 20 largest short positions, with a fairly even spread between significant increases and decreases in total positions.

Among the increases the two largest were in Henderson Group ((HGG) and Yancoal new shares ((YALN)). Shorts for Henderson rose to 3.61% from 0.83% the week prior, which followed at least one cut to earnings forecasts in the market as lower performance fees are being factored into the outlook for the company.

In Yancoal, short positions in the new shares increased to 3.62% from 0.85%, this as the market positions itself in the newly-listed coal play that was created by the merger of Yancoal of China and Australia's Gloucester Coal. While growth options appear reasonable, the major issue for the market appears to be high debt levels and a small free float of shares.

While the ramp-up of the Boseto project continues, earnings forecasts for Discovery Metals ((DML)) were cut modestly after the group's June quarter production report. For the week from July 10 short positions in the stock rose to 5.25% from 3.63%, likely reflecting some concerns with respect to the ramp-up process.

With respect to falls in short positions, the largest was in Mesoblast ((MSB)) where total positions declined to 3.65% from 6.46%. The latest news of note was some positives from a competitor's stem cell tests for heart attack victims, which is thought to be a positive for Mesoblast's own cardiac therapy.

In Iluka ((ILU)), which is one of the top 20 short positions in the market, the week from July 10 saw total shorts fall to 7.96% from 9.94%. The change in positions came after the company's quarterly production report, which was seen as broadly in line with expectations given it came just a few days after sales guidance for the year had been lowered.

Companies making up the top 20 short positions continue to be centred on certain sectors, with consumer discretionary plays leading the way. Among the largest positions are JB Hi-Fi ((JBH)), Harvey Norman ((HVN)), Flight Centre ((FLT)), Billabong ((BBG)), Carsales.com ((CRZ)) and Myer ((MYR)).

Building materials and associated stocks are also well represented given CSR ((CSR)), Boral ((BLD)) and GWA ((GWA)) all make the top 20, while resource stocks in the list include Paladin ((PDN)), Iluka and Alumina Ltd ((AWC)).

Shorts in St Barbara ((SBM)) fell to 2.51% from 3.75% leading into the company's quarterly production report, which was helped by better volumes and gold grades. Operational improvements at the Allied Gold assets remain an key variable for investors in St Barbara.

Dexus ((DXS)) enjoyed a fall in shorts to 0.27% from 1.27% the week before, this leading into next month's profit result where any strategic review announcements are likely to be of interest to the market.

In terms of monthly changes in positions for the period from June 15, it was Henderson Group and Discovery Metals that again led the way with increases of just over three percentage points and two percentage points respectively.

The next largest increases were in Alumina Ltd, where positions rose to 6.31% from 4.49% in the month and in Flight Centre, where positions have increased to 13.68% from 11.93% in the same period.

The discretionary retailers are among those where short positions have fallen the most for the month from June 15, with Myer's positions declining by more than four percentage points, David Jones ((DJS)) seeing a better than three percentage point decline and JB Hi-Fi's positions declining by just over 2.5 percentage points.

Shorts in Mesoblast and in Echo Entertainment ((EGP)) also declined by more than 2.5 percentage points over the month.

One increase in short positions over the past month of interest to RBS Australia has been in Nufarm ((NUF)), where positions have increased from less than 2.2% to more than 2.5%. In the view of RBS the stock needs earnings upgrades to deliver further share price gains, something considered unlikely given a tough operational environment at present. RBS Australia rates Nufarm a Hold at present, while the FNArena database shows one Buy rating, three Hold recommendations and three Sell ratings.

 

Top 20 Largest Short Positions

Rank	Symbol	Short Position	Total Product	%Short
1	JBH	20487424	98850643	20.73
2	FLT	13684263	100047288	13.68
3	FXJ	296687617	2351955725	12.61
4	CRZ	26390913	233689223	11.29
5	LYC	183100463	1715029131	10.68
6	COH	5693525	56929432	10.00
7	BBG	39755323	410969573	9.67
8	HVN	100515552	1062316784	9.46
9	GNS	75429555	848401559	8.89
10	CSR	44148544	506000315	8.73
11	PDN	71314995	835645290	8.53
12	ILU	33334008	418700517	7.96
13	MYR	46393558	583384551	7.95
14	LNC	39399260	504487631	7.81
15	WTF	15613320	211736244	7.37
16	TRS	1876854	26071170	7.20
17	DJS	36703400	528655600	6.94
18	AWC	153868681	2440196187	6.31
19	BLD	45219326	758572140	5.96
20	GWA	17781381	302005514	5.89

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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