The Short Report

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By Andrew Nelson

Significant decreases to short positions over the course of the week from 10-17 October overwhelmed significant increases. Short covering on the Australian Stock Exchange was at its heaviest all year, with the overall level of short interest falling to 2.35% from 2.47% by the end of last week according to data from RBS.

In fact, if we go by the book, there weren’t any significant increases at all. The largest weekly increase to a short position was booked by Aspen Group ((APZ)), but it only increased 1.95ppt from 1.28% to 3.23%. About three weeks back analysts at Macquarie commented on the company’s recent impairment charge and subsequent equity raising. The broker timed its forecasts and price target at that time and while noting the move should help alleviate some balance sheet pressure, the broker still felt more asset sales would be needed. The broker maintains a Sell call on the stock.

That’s it for the upside if we draw the line at moves of 1ppt or more. For the downside, we’re going to have stick with moves of 3ppt or more. Here’s why: there were 57 stocks whose short position decreased by more than 1ppt over the period. There were 24 stocks whose short position fell by 2ppt or more and 11 stocks whose short position declined by 3ppt or more. Given these numbers, I think this week we’ll draw the significant decrease line at moves of three percentage points or more, or you’d never be able to finish reading through the report.

The biggest decrease over the period was booked by Flight Centre ((FLT)), with its short position pulling back a whopping 8.73ppt from 13.19% to 4.66%. Both RBS and BA-Merrill Lynch put out comments on the company at the end of last month, and both brokers liked the direction in which the company is headed. The stock rates very positively on the FNArena Database, with six Buys and to Holds to its name. RBS and BA-ML are both at Buy. While the stock trades at a premium to valuation levels, the consensus is that it is well deserved.

Next on the list is Iluka ((ILU)), with its short position coming off 7ppt from 11.48 to 4.48%.  Despite what was rated as an average quarterly report earlier this month, which saw forecasts and the target price cut by a number of brokers, the stock is still positively regarded in the FNArena Database, with five Buys and three Holds. Macquarie did downgrade to Hold on the quarterly, but all others stayed form with their calls, noting good long term valuation support and good leverage to commodity prices when they do recover.

David Jones ((DJS)) finds itself at the number three spot, its short position dropping 5.71ppt from 9.12% to 3.41%. While there was no broker commentary over the period, the move did see DJ’s fall right of the top 20 most shorted list. The stock remains negatively regarded on the FNArena Database, with one Buy, four Holds and three Sell calls.

Fellow discretionary retailer JB HiFi ((JBH)) comes next, its short position down 5.21ppt from 22.18% to 16.97%. Again, there was no broker commentary over the period and the stock still rates neutrally in the FNArena Database with two Buys, three Holds and three Sells. Next comes yet another discretionary retailer, with shorts in The Reject Shop ((TRS)). The stock rates a flat neutral in the database, with one Buy, one Hold and one Sell. Credit Suisse, the holder of the Sell call, noted last week that its recommendation is primarily based on valuation, otherwise noting the prospect of an accelerated store rollout plan that has plenty of upside potential.

Next on the list is nickel miner Western Areas ((WSA)), whose short position fell 4.79ppt from 7.39% to 2.6%. The stock is positively regarded in the database, garnering five Buys versus three Holds. Last week’s quarterly came in better than expected and forecasts and price target were uniformly lifted. Staying in the resources space brings up to Lynas Corp ((LYC)), with its short position declining 4.28ppt from 13.61% to 9.33% after a sharp drop in share price last week. Both Citi and Deutsche downgraded their calls to Sell last week, citing further legal issues in Malaysia that continue to hold up the LAMP project. The stock is now negative in the FNArena Database, with one Buy, two Holds and two new Sells.

APA Group ((APA)) found its short position 4.12ppt lighter, moving from 6.27% to 2.15% , with Credit Suisse noting APA is caught between a stretched valuation and a 7.4% dividend yield. One Buy, one Sell and five Holds keep the stock at a flat neutral in the database. Online travel provider Wotif.com ((WTF)) is sitting on a short position that is 4.07ppt lower, moving from 6.22% to 2.15% after some not so well regarded AGM commentary least week. The stocks rates at a slight negative on the database, with one Buy, two Sells and five Holds recorded.

Gryphon Minerals ((GRY)) saw its short position fall 3.42ppt from 5.91% to 2.49%. The stock rates straight Buys in the databases, with 85.5% upside to the consensus price target. We’ll round out the decliners' list with Alumina ((AWC)), which found its short position had dropped 3.13ppt from 8.94% to 5.81% after its 3Q loss coming in better than most brokers expected last week. The stock sit just on the north side of positive, with three Buys, four Holds and two Sells.

On a monthly basis, we can add both Matrix Composites ((MCE)) and Fairfax ((FXJ)), whose short positions were up 3.14ppt and 2.63ppt respectively. Matrix rates a neutral in the database, as does Fairfax, with no broker commentary out on either over the past few weeks.

The upside list on a monthly basis looks almost exactly the same as the weekly list covered above, expect for a few minor positional changes. We’ll give a special shout out to Fortescue ((FMG)), as it is nice proxy for the up and down iron ore market. Shorts in the stock were down 2.79ppt on a monthly basis, going from 7.26% to 4.47%, pretty much tracking the mini recovery goings on in the iron ore market. The stock remains positively regarded in the FNArena Database, with six Buys and just two Hold on record. All eight brokers covering the stock came away from last week’s quarterly either happy with current progress, or at least not bothered by it.

We’ll end out coverage with some commentary from RBS, who notes the actual value of outstanding short positions fell by around $1bn over the course of last week. Despite the bump in consumer discretionary plays noted above, the broader sector was still a bit more shorted over the period and remains the most shorted across the market. Conversely, the resources sector was the big winner over the period.

Speaking of consumer discretionary plays, the broker notes short interest in Myer ((MYR)) has increased from 10% to 12.8%, with the broker believing current margin expansion won’t be enough to offset rising costs. RBS expects revenue and earnings will fall over the coming years, thus seeing better domestic consumer exposure elsewhere in the market. Maybe the recent strong performance in apparel might bear watching, says the broker.
 

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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