The Short Report

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By Andrew Nelson

Significant increases and decreases to overall short positions were limited on the Australian stock market over the week from 7 to 14 November. Changes to short positions on a monthly basis were a different story, however, with ASIC reporting some 14 stocks that saw a greater that 3 percentage point (ppt) increases to short position over the four weeks to 14 November 2012.

Weekly moves to the upside were lead by Linc Energy ((LNC)), with its short position advancing 1.06ppt from 4.91% to 5.97%. Macmahon Holdings ((MAH)) finds itself at the number two position, its short position up 1.05ppt from 0.55% to 1.59% after early last week lowering FY13 earnings guidance in a move to control costs by reducing the scale and complexity of the company’s construction business. The stock is somewhat negatively regarded in the FNArena Database, with three Holds and one Sell on record, while there is also more than 12% upside to the consensus target price from current levels.

The weekly downside list was equally as brief. Industrea’s ((IDL)) short position pulled back 1.8ppt from 2.15% to 0.35% on a dearth of broker commentary. Miner and mining services contractor CuDeco ((CDU)) comes next, its short position coming off 1.54ppt from 3.63% to 2.09% after undertaking a capital raising last week.

The Weekly Top20 list looks almost like a carbon copy of the week prior and the week before that. There was only one remarkable standout, which was Mesoblast ((MSB)) dropping off the list from the 20^th spot and being replaced by Monadelphous ((MND)), which hit the list at number 15. Macquarie noted towards the end of October that falling commodity prices, rising costs and tougher financing is continuing to take a toll on the outlook for resource sector capex, with MND doing it extra tough given 90% of group revenue comes from the Australian resource sector.

As mentioned earlier, all the action is on the monthly table, with nine stocks seeing short interest levels increase by more than 4ppt, while there was just one decrease greater than 2ppt. The one decrease was booked by Aspen Group ((APZ)), with its short position slipping 2.36ppt from 2.37% to 0.01% on a vacuum of broker commentary. The stock remains a straight Sell in the FNArena Database, with shares trading t a 2.4% premium to consensus targets.

The list is a fair bit longer on the upside, with a 5.75ppt increase to its short position from 1.13% to 6.68% making SingTel ((SGT)) biggest monthly gainer. 1Q earnings came in a bit weaker than hoped for last week, but brokers remain fairly positive on the stock, with the FNArena Database showing four Buys and just two Holds. Next to Feature is Alumina ((AWC)), whose short position has gone from 2.64% to 8.37%, or 5.73ppt higher on a monthly basis. Brokers had been worried over the last weeks of October through the early part of November about talk Indonesia’s raw material export ban had been overturned by the nation’s Supreme Court. With comments only partially true, the stock remains positively regarded in the database, boasting four Buys, two Holds and two Sells, with more than 35% upside on offer to the consensus target price.

Iluka’s ((ILU)) overall short position is up 5.67ppt from 7.4% to 13.07% on the month. The company has been struggling of late with weak zircon prices and given Macquarie sees this weakness carrying on until well into 2013, the broker downgraded to Underperform from Neutral about a week back. The stock remains positively regarded in the database, however, with five Buys, two Holds and one Sell and also more than 42% upside on offer to the current consensus price target. Lynas Corp ((LYC)) rounds out the bigger than 5ppt moves, with its short position increasing 5.11ppt from 8.11% to 13.22%. The company cleared a hurdle a couple of weeks back when the injunction against its temporary operating license was tossed out, but there’s still a long way to go until first shipment. The stock sits just south of the negative border in terms of broker sentiment, with one Buy, two Holds and two Sells on show in the database.

Maintaining the prominence of retailers in the short lists is Myer ((MYR)), with its short position increasing 4.77ppt from 9.87% to 14.64%. Brokers reviewed the latest quarterly last week and were pleased, for the most part, by a continuation of slightly improving sales trends. Although, Citi did downgrade its call to Neutral from Buy, thinking the upside so far is already priced in meaning shares are starting to look a bit expensive. The stock enjoys three Buys, three Holds and two Sells in the database.

Flight Centre ((FLT)) finds itself next in line, its short position climbing 4.76ppt from 7.66% to 12.42% despite a surfeit of broker commentary over the past few weeks. With five Buys and two Holds, the stock is positively regarded in the FNArena Database, with BA-Merrill Lynch confirming its positive view about a week and a half back, noting there is an ongoing and accelerating shift to online travel and this bodes well for Flight Centre. Fairfax ((FXJ)) has maintained its prominent position on the upside, with short on a monthly basis up 4.34ppt from 12.08% to 16.42%. The company announced last week it had sold its US agricultural publishing business. Both Citi and Deutsche thought the news was good, as it leaves the balance sheet in much better shape.

Harvey Norman’s ((HVN)) short position was up 4.28ppt from 6.05% to 10.33%, with the company putting out a fairly soft quarterly about a week and a half back. Sentiment remains just to the south of neutral, with two Buys, three Holds and three Sells. Cochlear ((COH)) finds itself the last of the 4ppt or more movers, with its short position 4.02ppt from 4.68% to 8.7% on a monthly basis. The stock is weighed down by five Sells and two Holds in the database, with Credit Suisse downgrading to Sell last week citing relative share price performance.

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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