The Short Report

This story features BURU ENERGY LIMITED, and other companies. For more info SHARE ANALYSIS: BRU

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By Andrew Nelson

Short activity on the Australian share market for the week to 31 October 2012 was much more subdued than the week prior. In terms of weekly moves greater than 1 percentage points (ppt), there were only three to the downside versus just one to the upside.

Australand ((ALZ)) saw its short position pull back 2.61 percentage points (ppt) from 2.64% to 0.03% over the period. While not have any bearing on the period in question, brokers did cover the company’s 3Q numbers earlier this week. Reviews were positive, although Credit Suisse did downgrade its call to Neutral given the recent run in the share price. Otherwise, the broker liked the update. Despite the downgrade, the stock remains well regarded in the FNArena Database, with five Buys and two Holds. Current trading levels are offering 4.2% upside to the consensus price target.

The second largest decline was booked by Buru Energy ((BRU)), whose short position dropped 1.72ppt from 5.39% to 3.67% on the week. JP Morgan reported last week the company had recommenced drilling on the Ungani North-1 well, which the broker thinks could be a significant valuation driver for the stock, if successful. JP Morgan maintains a Buy call on the stock, with 64.7% upside to the consensus price target on offer.

Online travel retailer Wotif.com ((WTF)) finds itself at the number three position on the weekly list (and the monthly list as well), with its short position slipping 1.1ppt from 5.59% to 4.49% from the 24th to the 31st of October and down 2.80ppt for the entire month of October. The company advised at its AGM towards the end of the month that it has pushed up commission rates. The news was fairly well received by brokers and saw price targets and forecasts lifted for the most part. A big problem a number of brokers have is the amount of cost cutting being done to maintain earnings, with slashed marketing budgets doing little to help drive future growth. It is hoped at least some of the extra cash flow will be spent on maintaining and then increasing sales. The stock nearly rates neutral on the FNArena Database, with one Buy, five Holds and two Sells. At current levels, the stock is trading at a 5.2% premium to its consensus price target.

Switching ledgers to the increase side brings us to WHK Group ((WHG)), whose short position ticked 1.26ppt higher from 0.06% to 1.32%. Macquarie reported last week the company had been approached by SFG Australia ((SFG)) about a potential merger of equals. The broker thought it was good news for both companies. The stock is a little better than neutrally regarded in the database, with a Buy from Macquarie up against two Holds. BA-Merrill Lynch dropped its call to Hold back in August on the back of a slightly disappointing FY result, with the broker noting margins were its main concern going forward.

Myer ((MYR)) just missed the cut-off, its short position down only 0.99ppt, but we’ll give the high street retailer a shout out none the less. The overall short position in the stock was down to 12.89% from 13.88% over the period despite silence from the broker community. The stock is just north of positive in the database, with three Buys, three Holds and two Sell recorded. There’s 7.5% upside on offer from current levels to the consensus price target.  

The composition of the Top 20 most shorted stocks list hasn’t changed a bit other than a few stocks making minor moves up and down in the standings.

There was a bit more action on a monthly basis, with eight stocks moving up or down by at least 2ppt or more. Fairfax ((FXJ)) was at the top of last week’s monthly upward mover list and it has maintained its position into this latest report.  The publisher’s short position has climbed 3.36ppt from 12.44% to 15.80% over the monthly period despite the company’s AGM towards the end of October giving brokers a little confidence, with some signs of a minor trading improvement. The stock remains neutrally regarded in the database, with more than 60% upside to the consensus target.  

Just like in last week’s report, Matrix Composites ((MCE)) finds itself once again at the number two spot for monthly increases, with shorting of the stock increasing by 3.04ppt from 1.13% to 4.17% over the month of October. JP Morgan upgraded its call to Buy from Hold last week on bad news, reasoning that most of the bad news must now surely be behind the company now. The stock enjoys straight Buys in the FNArena Database, with 18.5% upside to the consensus price target.

Myer sits at the number three spot, with its short position 2.24ppt higher on a monthly basis. Rounding out the significant increase lists Biota ((BTA)), whose short position has advanced 2.24ppt from 0.38% to 2.62% over the month. However, with RBS dropping coverage last week, there are now no major brokers covering the stock in the Australian market. There’s a good reason for this. Post the completed merger with NABI last month, shares no longer trade in Australia, having moved to the Nasdaq.

APA Group’s ((APA)) short position has posted the biggest monthly decline, down 4.31ppt from 5.88% to 1.57% over the monthly period. Credit Suisse said a couple of weeks back that while APA looks fully valued at current levels, a 7.4% yield is on offer, with good prospects of increasing. Linc Energy ((LNC)) is at the third spot for monthly decreases, with its short position 2.51ppt lower from 6.76% to 4.25%. Linc is positively regarded in the database, while APA rates a flat neutral.

Carsales.com ((CRZ)) sits at the number four spot among monthly decliners, with its short position 2.04ppt lower from 6.38% to 4.34%. Deutsche Bank reported at the end of October that the company’s AGM commentary was pretty much in-line with expectations. The broker retained its Hold call, noting the positive growth story for the stock appears largely priced in. Deutsche maintains one of five Hold calls, with one Buy issued by Credit Suisse.

 

Top 20 Largest Short Positions

Rank	Symbol	Short Position	Total Product	%Short
1	JBH	20138654	98850643	20.37
2	FXJ	351168282	2351955725	14.93
3	MYR	78670275	583384551	13.49
4	LYC	222801793	1716159363	12.98
5	FLT	12704604	100149257	12.69
6	ILU	51138619	418700517	12.21
7	TRS	2677014	26092220	10.26
8	HVN	99331755	1062316784	9.35
9	DJS	47676953	528655600	9.02
10	PDN	74077435	836825651	8.85
11	COH	4802315	56975605	8.43
12	AWC	204054839	2440196187	8.36
13	TEN	120093236	1437204873	8.36
14	CSR	38179717	506000315	7.55
15	WSA	12954464	179735899	7.21
16	SLR	16011706	225493476	7.10
17	FMG	202624953	3113798659	6.51
18	MTS	56248071	880704786	6.39
19	BLD	47724270	766235816	6.23
20	GNS	51528090	848401559	6.07

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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