The Short Report

This story features WHITEHAVEN COAL LIMITED, and other companies. For more info SHARE ANALYSIS: WHC

By Andrew Nelson

Short activity, regarding both increases and decreases, moderated a little over the week to 12 September 2012. There were twice as many significant decreases in short positions as there were significant increases, but the numbers were just two increases of over one percentage point versus four decreases.

Increases were lead by Lynas Corp ((LYC)), with the company’s total short position increasing by 1.96 percentage points from 11.37% to 13.33%. The increase has further cemented the company’s position at number three on the Top 20 Largest Short Positions leaderboard. The company remains positively regarded in the FNArena database, with Deutsche Bank upgrading the stock to Hold on 6-August on news the company’s LAMP project had finally been granted a temporary operating license. Other brokers also received the news positively, but note risks remain.

Industrea ((IDL)) booked the second largest increase over the period, with its short position increasing by 1.24ppt from 0.98% to 2.22%, with no recorded broker commentary seen over the past few months. The stock is Neutrally regarded in the FNArena Database, with two Hold calls and BA-Merrill Lynch restricted since the announcement of the company’s takeover by GE back in May. The takeover is progressing and is scheduled to complete by 30 November 2012.

Bathurst Resources ((BTU)) and Whitehaven Coal ((WHC)) are tied for third place on the weekly increases list, with the short position in each stock advancing 0.96ppt.  Bathurst has moved from 5.45% to 6.41% shorted, while Whitehaven’s total short position increased from 3.92% tom 4.88%. Whitehaven enjoys all Buys in the FNArena database with nothing heard from brokers since Tinkler’s takeover withdrawal at the end of August, while Bathurst also boasts two Buys from Credit Suisse and UBS in the FNArena Database.

APN News & Media ((APN)) found itself at the top of the table amongst significant decreasers in short positions over the weekly period. Shorts in the company pulled back 1.8ppt from 3.71% to 1.91%. The stock is Neutrally regarded in the FNArena database and while having no bearing on the short position move, JP Morgan yesterday trimmed its earnings forecasts to account for the impact of reduced advertising spending.

UGL ((UGL)) finds itself next on the decreases list, taking back most of the short position increase it booked the week prior. Last week, the company’s short position retraced 1.45ppt from 5.84% to 4.39%, with brokers putting out positive commentary last week and the week before about the progress being made at the company’s Asian operations. The stock remains slightly positively regarded in the FNArena database.

Short position in Downer EDI ((DOW)) pulled back by 1.27ppt from 3.69% to 2.42% after analysts returned from a site visit last week. The stock is rated a strong Buy in the FNArena Database, with seven Buys and just one Neutral call from UBS, who remains a little concerned about the risk profile of the Waratah project.

The last of the better than one percent improvements was booked by St Barbara Mines ((SBM)), with its short position retreating 1.01ppt from 4.47% to 3.46% . The stock remains Neutrally regarded in the FNArena, with one Buy, one Hold and one Sell. Investors, too, seem to be of varying opinions, with the stock seeming to feature on one side or the other of the significant movers list almost every week of late. It seems brokers and investors alike just don’t  know how to view the proposed tie up with Allied Gold ((ALD)).

The weekly Top 20 list looks pretty much the way it did last week. There were a few minor position changes, the biggest of which was booked by Cochlear ((COH)), dropping from 8th to 14th on the list. Short positions in the stock declined 1.35ppt from 10.2% to 8.5% after news its N5 device failure rate was moderating. The stock remains a Sell on the FNArena Database, with brokers worried about the reputational damage and market share losses that are expected because of the N5 issues.

Given the limited change to the Top 20 list over the period, discretionary retail plays still hog the bulk of the top spots on the 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 ((TRS)), Harvey Norman ((HVN)), Myer ((MYR)) and David Jones ((DJS)). All remain in the top 10 except Harvey Norman, which slipped from 10 to 11 over the period.

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

There was much more significant movement on a monthly basis, with 17 stocks booking an increase of one percentage point or more, while just seven stocks enjoyed a better than one percentage point decrease in position.

Whitehaven’s move last week helped boost it to the number one spot for monthly increases, with its short position advancing 3.26ppt to 4.86% over the month. APA Group ((APA)) was next on the list, its short position picking up 3.04ppt from 1.82% to 4.86%, with Macquarie noting last week that the recent AER ruling for the group was a tough one. The stock is Neutrally regarded in the FNArena Database, with four Neutrals, one Buy, one Sell and two Restricteds recorded.

Lynas’ short position increased by 2.31ppt to 13.33% on a monthly basis, while Industrea found itself second on the monthly list as well as second on the weekly.

Perennial Top 20 player Carsales ((CRZ)) found itself on the top of the monthly decreases list, with its short position pulling back 2.66ppt from 9.97% to 7.31%. The move did little to improve its position on the Top 20 list, though, as it actually rose from 19 to 17 on that weekly list. Brokers remain Neutral on the stock for the most part, although Credit Suisse has it at Outperform.

Discovery Metals ((DML)) was next, its short position improving 2.19ppt from 4.69% to 2.5%, while Seven West ((SWM)) was down 1.73ppt from 3.51% to 1.78%. There was no broker commentary published over the month on SWM, but the stock remains positively regarded on the FNArena Database with seven Buys and one Hold from Deutsche.

Analysts from RBS note that as the market continues to advance, so is short positioning, which still sits at a record high average of 2.5%. The broker points out small to mid-cap resources and capital goods stocks continue to dominate the short positions, while the transport sector has also seen a recent spike. Toll Holdings ((TOL)), Virgin Australia ((VAH)) and Qantas ((QAN)) are now 2.9%, 1.8% and 1.3% shorted respectively.

The broker also notes that short interest in Sonic Healthcare ((SHL)) has doubled in the past two weeks to 2.6%. While the broker continues to like the company’s prospects, it sees limited upside from current levels and believes the market is growing increasingly concerned about looming global fee structure adjustments in a number of geographies.

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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