The Short Report

This story features NEWS CORPORATION, and other companies. For more info SHARE ANALYSIS: NWS

By Andrew Nelson

For the week to 05 September 2012, significant increases in short positions far outweighed significant decreases, both in terms of the numbers and in terms of the average magnitude of the changes. Just one stock saw its short position pull back by more than one percentage point over the period, while nine stocks experienced a greater than one percentage point increase.

We’ll start our coverage on the decrease side of the ledger, as it is a fairly short list of just one. After last week sitting on the top of the increase list, Allied Gold ((ALD)) finds itself on top of the weekly short decrease leader board this week, with total shorts decreasing by 2.49 percentage points from 2.81% to 0.32%. Investors have seemingly come to grips with the St Barbara Mines ((SBM)) merger that was approved by the High Court a few weeks back.

St Barbara, who were number two on the increase list last week right behind Allied didn’t respond in the quite the same fashion. Shorts in SBM actually increased a further 0.87 percentage points from 3.60% to 4.47% over the period. The stock remains Neutrally regarded by brokers in the FNArena database, with one Buy, Hold and Sell call recorded. The company’s FY result was reviewed by all three brokers towards the end of August, with Macquarie noting some doubts about the risk/reward profile of the merger.

Number eight on this week’s Top 20 list (that being a list of the 20 most shorted stocks on the Australian market) also booked a decline in its overall short position, albeit a minor one. Shorts in the shares in Cochlear ((COH)) declined 0.42 percentage points to 9.51% from 9.53%. The stock is negatively regarded by brokers in the FNArena database, with 4 Sells and 4 Neutrals. Yesterday, the company announced new N5 failure rates from US data that most brokers saw as a sign of improvement. Of course, this news would have had no impact on short position moves up to Sept. 5.

Number 19 on this week’s Top 20 list, Carsales ((CRZ)), also featured near the top of the decliners list, with short positions coming off 0.47 percentage points to 7.59% from 8.06%. Full year earnings in mid-August were well received. Again, while having no bearing on last week’s short position moves, Macquarie noted this Monday that it seems the threat from News Ltd’s ((NWS)) Carsguide that many were expecting to take a chunk out of Carsales has pretty much proved a non event.

Switching focus to the other side of the table, we see that three of the top 4 biggest increases in short position over the week were booked by retailers. Shorts in The Reject Shop ((TRS)) advanced 2.77 percentage points from 7.87% to 10.64%, seeing it now sit at number 5 on the Top 20 list. The company’s FY efforts were fairly well received by brokers late August; with Credit Suisse even lifting its call to Neutral post release. The Reject Shop would likely be higher on the list were JB HiFi ((JBH)), Flight Centre ((FLT)), or Fairfax ((FXJ)) to relax their grip on their seemingly permanent Top 5 spots a little.

Fellow retailer Myer finds itself at number two on the increase list, helping it to easily maintain its position in the Top 20. Short positions in the company increased by 2.70 percentage points from 7.23% to 9.93% over the week. The company reports FY numbers today and just this Monday analysts at Citi voiced their concerns about falling margins. The guys across the street at David Jones also saw their short position increase significantly, rising 2.27 percentage points from 7.18% to 9.45%.

Cabcharge saw its short position grow by 2.57 percentage points from 1.61 to 4.18%. In-line FY results were fairly well recieved in the last week of August and the stock is Neutrally regarded by brokers in the FNArena database, boasting one Sell, one Buy and four Holds.

Engineering services companies also featured amongst the biggest increasers, with Downer EDI ((DOW)), UGL ((UGL)) and Monadelphous ((MND)) all seeing their short position increase by more than 1%. Shorts in both Downer and UGL lifted by 1.71 percentage points, taking Downer to 3.69% shorted and UGL to 5.84%. Monadelphous’ short position rose 1.45 percentage points to 5.88%.

While there has been little of note from Downer over the past few weeks, last week saw UGL host analysts in Shanghai to talk about the new strategy. The response was fairly positive for the most part. Both stocks are regarded positively by brokers in the FNArena database, although out the two, Downer is the more favoured. UGL had to issue a profit warning in August.

The weekly Top 20 list looks pretty much the same as last week, with a only a few minor position changes of note.

Discretionary retail plays continued 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 ((JBH)), Flight Centre ((FLT)), The Reject Shop, Harvey Norman ((HVN)), Myer and David Jones. All remain in the top 10.

Resources and resources services stocks also maintain their prominent positions in the top 20.  Lynas ((LYC)) and Iluka ((ILU)) remain in the Top 10, while numbers 11-20 are dominated by base materials plays of various description such as CSR ((CSR)), Alumina ((AWC)), Paladin ((PDN)) and Fortescue ((FMG)).

The picture was quite similar looking at the monthly changes to short positions, with 21 stocks booking an increase of 1 percentage point or more, while just eight stocks enjoyed a better than 1 percentage point decrease in position.

The most prominent move on the decrease side of the ledger was booked by Discovery Metals ((DML)), with its short position falling 3.02 percentage points from 5.31% to 2.29%. The latest broker commentary on the stock came from Citi at the end of August, with the broker worried that costs will come in much higher than expected. The broker has DML at Sell, versus two Buys and a Neutral that are also recorded in the FNArena database.

Carsales was number two on the decrease list, down 2.74 percentage points from 10.33% to 7.69% shorted. Next was Seven West ((SWM)), whose short position declined 1.93 percentage points from 3.77% to 1.84%.  The stock is very positively regarded in the FNArena database, with broker’s positively reviewing the company’s FY effort on the 23-24 of August.

The most significant monthly decrease was posted by Silver Lake Resources ((SLR)), with JP Morgan liking the FY result last week and seeing potential upside from the Integra Mining ((IGR)) acquisition.

APA Group ((APA)) was next on the list, with short positions pulling back 2.80 percentage points to 4.51%, while Whitehaven Coal’s ((WHC)) short position improved by 2.43 percentage points to 3.92% shorted. The latter stock enjoys across the board Buy call in the FNArena database.

Monadelphous and Mesoblast ((MSB)) round out the top 5 decliners list. Both companies enjoy marginally positive ratings in the FNArena database and neither have drawn broker commentary over the past three weeks.

Looking at the week to 10 September, analysts from RBS note short positioning across the market remains at a record high average of 2.4%. Small to mid-cap resource stocks like Iluka and Panoramic Resources ((PAN)) remain key targets. The broker also points out that shorts in both Gold and Iron Ore stocks have doubled in the past six months, while Capital Goods stocks have also seen a recent spike in short interest.

On the other hand, short covering in banks has been the recent trend, with short decreases in Westpac ((WBC)) and Commonwealth Bank ((CBA)) more than offsetting the rise in shorts booked by National Australia Bank ((NAB)), which the broker notes has gone from 0.4% to 1.0% over the past two weeks.

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