The Short Report

This story features FLIGHT CENTRE TRAVEL GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: FLT

By Andrew Nelson

Significant decreases in short positions outweighed significant increases for the week to August 21. There were six companies that experienced a total short increase of more than 1.0 percentage points, while there were seven instances of shorts decreasing by more than 1.0 percentage point over the course of the week.

Analysts from RBS note that index-weighted short interest across the S&P/ASX 200 is at its lowest level this year. That said, average shorts are significantly higher, at 2.4%, which the broker notes is a sign of elevated short interest in small-cap stocks, on average.

On a sector basis, RBS’s numbers show short positions continue to be covered in the Building Materials and Media sector, while Healthcare stocks have seen a sharp increase in short interest over the past six weeks.

As far as companies reporting this week go, short selling activity remains high in Flight Centre ((FLT)) at 13.3%, Aristocrat ((ALL)) at 4.6%, Perpetual ((PPT)) at 5.5% and Harvey Norman ((HVN)) at 9.9%.

While by no means massively shorted just yet, the broker has noticed an interesting trend developing with Bendigo and Adelaide Bank ((BEN)). Over the past four months short positions have been increasing steadily, up 1.5% over the period to 2.5% right now. The broker thinks this could have something to do with the fact that the PE ratio is too high for the flat FY12-15 EPS outlook.

Whitehaven Coal ((WHC)) finds itself on top of the short increase leader board this week, with total shorts increasing by 2.43 percentage points from 1.58% to 4.10% over the course of the week. News that Nathan Tinkler has withdrawn his bid for the company may well have a further impact next week. The stock remains favourably viewed by brokers, enjoying unanimous Buy ratings in the FNArena database.

Another noteworthy increase in short position was booked by Fortescue Metals ((FMG)), posting a 1 percentage point increase from 5.72% to 6.72%. The stock remains positively regarded, with only one Neutral vs seven Buys in the FNarena database. The company’s FY result was positively regarded, but brokers in general are turning more cautious on the prospects of iron ore plays given the protracted weakness in iron ore prices.

Shorts in APA Group ((APA)) picked up by 1.19 percentage points from 2.20% to 3.39%, while short positions in Wesfarmers ((WES)) rose 1.0 percentage point from 1.98% to 2.98%. Wesfarmers is a neutrally regarded stock in the FNArena universe, seeing an upgrade from RBS and a downgrade from Citi the week before last in the wake of FY earnings.

The Reject Shop ((TRS)) led the list of short position decliners, dropping 2.93 percentage points to a short position of 7.52%, down from 10.45% the previous week. The stock is somewhat favourably rated by brokers, with Credit Suisse upgrading its call to Neutral last week in the wake of an in-line FY report.

Cabcharge ((CAB)) is next off the rank, shedding 2.27 percentage points to 1.69% shorted from 3.96% after reporting in-line FY results last week. Myer ((MYR)) also enjoyed a decline in its overall short position, which came off 2.13 percentage points to being 7.52% shorted from 9.65%  despite downgrading its FY guidance last week.

Probably the most notable decline in short position was posted by perennial short market leader JB HiFi ((JBH)). Overall shorts declined 2.08 percentage points to 18.91% from 20.99% after posting an in-line FY result a couple of weeks back. Broker opinion leans to the negative side, but those positive on the stock like the longer term prospects of the company.

Despite improvements in The Reject Shop, Myer’s and JB HiFi’s short positions, discretionary retail plays continue to dominate the top 20 most shorted list, with investors and brokers remaining concerned about the uncertain consumer outlook. Significant short positions were maintained by JB Hi-Fi, Flight Centre ((FLT)), The Reject Shop, Harvey Norman ((HVN)), Myer, which are all in the top 10.

Looking at month on month numbers, stocks on the decrease again far outweighed stocks on the increase, both in terms of the raw numbers and in terms of the magnitude of changes. Twenty two  stocks saw short position improve by more than 1 percentage point, while eleven increased by more than 1 percentage points.

Billabong’s short position continued to decrease, with the month on month decline now a whopping 9.3 percentage points to 1.32% short from 10.62% short. The ongoing takeover bid from TPG is driving the stock right now. The Reject Shop and Myer also featured prominently on the monthly decliners list.

Gunns ((GNS)) also saw a marked decrease in month on month terms, with its short position declining by 2.39 percentage points to 6.5% shorted from 8.89%. The stock is negatively viewed by those brokers that cover it and there has been little in the way of newsflow of late.

Wotif ((WTF)) also sits near the top of the monthly increase list, with its short position climbing 2.53 percentage points to 8.19% shorted from 5.66%. Last week’s FY result came in ahead of the market, but those brokers more negative on the stock seem to think the company won’t be able to pull the cost cutting lever too much longer.

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.

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