The Short Report

This story features MACMAHON HOLDINGS LIMITED, and other companies. For more info SHARE ANALYSIS: MAH

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By Andrew Nelson

Short activity was subdued across the Australian market last week, with no moves greater than 2 percentage points (ppt) and just a handful moving more than 1ppt. There was more action in total on the increase side of the ledger, with the normal weighting of miners, consumer based, plus building and materials plays dominating the top positions. There’s not much of a conclusion to be drawn here, as the same sectors comprised most of the top spots on the downside as well.

The first cab off the rank is copper, cobalt and gold explorer CuDeco ((CDU)), whose short position increased 1.52ppt from 2.11% to 3.63% over the week from 31 October to 7 November 2012. The company doesn’t enjoy coverage from any major Australian broker, although it did announce yesterday it would look to raise $30m to be used for the further development of the Rocklands Group Copper Project in North-West Queensland.

Bradken ((BKN)) finds itself next on the increase list, with its short position advancing 1.43ppt from 3.93% to 5.36%. The company hosted its AGM a week before the period in question, with broker’s growing increasingly concerned, as earnings visibility is quickly disappearing and demand is falling faster than expected. Most brokers responded by trimming price targets and forecasts, although RBS downgraded to Neutral on the expectation of further softening in capital products demand over the next 3 to 6 months. The cut wasn’t too damaging to the company’s overall broker sentiment, with shares still firmly in Buy territory on two Holds and five Buys in the FNArena Database.

At the number three spot we find SingTel ((SGT)), with its short position advancing 1.15ppt from 5.32% to 6.47%. There has been little in the way of broker commentary of late, although BA-Merrill Lynch did note last week that Group Digital Life's growth plans shouldn’t impact on dividend expectations. The stock sits midway into positive territory in the FNArena Database, with two Buys and three Holds.

Online travel retailer Wotif.com is at number four, its short position 0.92ppt higher from 4.49% to 5.41%. There was significant broker commentary on the stock towards the end of October, with most positive on AGM news the company will progressively lift the rates it charges to supplier. Otherwise, consensus has a fairly flat year dialled in. The stock remains in negative territory in the database, with one Buy, two Sells and five Holds.  Shares are currently trading at a 6% premium to the consensus price target.

There wasn’t one stock that saw its short position pull back by 1ppt or more, with the best effort booked by McMahon Holdings ((MAH)). The company’s short position was 0.9ppt lower, down from 1.45% to 0.55%. At the beginning of the month Deutsche Bank noted the company had been appointed the preferred contractor for Fortescue's ((FMG)) Christmas Creek project. A definite, if slight positive. Analysts from Macquarie also reported last week the company intends to shift its focus from the construction business, with increased focus on growing the mining business. The stock is somewhat negatively regarded in the database, with four Holds and one Sell recorded.

The composition of the Top 20 most shorted list is almost exactly the same, with only a few minor position changes taking place. There was a bit of a change composition wise at the bottom of the list, with Gunns ((GNS)) falling out of the Top 20 (in administration) and Mesoblast ((MSB)) taking its place at number 20.

Monthly changes of more than 2ppt were also fairly muted, with 5 stocks moving higher and 3 stocks lower. The biggest  monthly increase was booked by Fairfax ((FXJ)), with its short position up 3.2ppt from 13.12% to 16.32% over the period. Brokers were fairly positive on the company AGM commentary at the end of October, with the stock remaining at flat neutral in the database on three Buys, three Sells and two Holds. The database shows more than 65% upside to the consensus target price.

Matrix Composites ((MCE)) is at number two on the monthly increase list, its short position advancing 3.05ppt from 1.12% to 4.17%. JP Morgan upgraded the stock at Buy at the end of October, noting the company would be scaling back of production until the order book improves. Bradken is next on the list, its short position 2.12ppt higher to 5.36% over the month.

Biota ((BTA)) has seen its short position increase 2.12ppt from 3.24% to 5.36% over the month in question. We’ll soon see this stock disappear from mention as Australian holdings are wound down post the company’s merger with NABI and a move over to the Nasdaq. Lastly, Cardno ((CDD)) saw its short position rise 2.07 ppt from 1.83% to 3.9% over the month. RBS upgraded to Buy on the stock last week, noting the share price had dropped 18% since peaking in August post the FY result. The broker reckons current levels are now offering quite a good buying opportunity. The stock enjoys two Buys and one Hold in the database, with nearly 11% upside on offer to the current consensus target price.

APA Group ((APA)) sits at the top of the decliners list, its short position down 4.8ppt from 6.5% to 1.7%, with Credit Suisse noting earlier this week that while there are little in the way of earnings catalysts on the horizon, the current yield of 7.4%, which could grow by 3%pa, should help support the share price. The stock sits at neutral in the database, with one Buy, one Sell and four Holds.

Next on the decrease list is Mount Gibson ((MGX)), which has seen its short position retrace 2.93ppt from 3.29% to 0.36% over the month. The company’s quarterly at the end of October was pretty well received and sees the broker maintain a fairly positive sentiment in the FNArena Database, with four Buys, three Holds and a Sell. There is currently 45% upside to the consensus price target.

The last stock we’ll mention is Independence Group ((IGO)), whose short position has come off 2.37ppt from 5.13% to 2.76%. Last week the company put out its quarterly report, which was fairly well received by brokers and was enough to see Deutsche lift its call to Buy. The stock is positively regarded in the database, with three Buys and three Holds and 7.5% upside to the consensus price target.

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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