The Short Report

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By Andrew Nelson

Shorting activity was fairly subdued on the Australian Stock Exchange over the week from 14-21 November 2012, although overall average positions were extended. Discretionary Retail and Capital Goods stocks attracted much of the recent short selling activity, with both sectors prominently featuring on the Top 20 most shorted stocks list.

Just one stock increased its overall short position by more than one percentage point (ppt) or more, while only two stocks decreased by the same measure.

We’ll lead off with the very brief increase side of the ledger, featuring only Wotif.com ((WTF)). Shorts in the stock increased by 1.9ppt from 4.69% to 6.59% despite a vacuum of broker commentary. Back towards the end of October the company did make a well received move to lift its commission rates going forward, but the broker community has been silent since then. The stock is slightly negatively regarded in the FNArena Database, scoring one Buy, two Sells and four Holds. Shares are currently trading at an 8.1% premium to the consensus price target.

The decrease side of the ledger is topped by ASG Group ((ASZ)), whose short position pulled back 1.37ppt from 1.7% to 0.33% over the period. The stock is neutrally regarded in the database, with two Holds on record. There is currently 46% upside to the current consensus price target.

Next on the list is Short Report favourite Lynas Corp ((LYC)), with its short position declining 1.14ppt from 13.22% to 12.08% over the week in question. Last week, Macquarie upgraded its recommendation to Outperform from Underperform, noting the first rare earth ore from WA has landed at the LAMP in Malaysia and is ready to be fed in by month's end. The stock is somewhat positively regarded in the database, which shows two Buys, one Sell and one Hold. The share price is currently offering 41% upside to the consensus price target.

The weekly Top 20 most shorted stocks list looks pretty much the same as it did last week, although Lynas Corp did manage to drop from 4^th to 6^th position. There were a few more minor position changes, but otherwise composition of the list is the same as last week.

There was a bit more action over a monthly period, with four stocks increasing their short position by more than 2ppt, while there were two stocks that booked declines of the same magnitude. The largest monthly increase to overall short position was posted by energy exploration, development and production company Linc Energy ((LNC)). The company’s short position advanced 3.67ppt from 2.81% to 6.48% over the month.

SingTel ((SGT)) finds itself next in line, its short position rising 3.61ppt from 3.39% to 7.0% over the period. The stock is positively regarded in the FNArena Database, sitting on four Buys and two Holds. Last week, Credit Suisse lifted forecasts and upgraded its recommendation to Buy, noting a more positive view on the group’s Bharti business in India suggests improved earnings. There is currently 11% upside to the consensus price target.

Next in line is Bradken ((BKN)), whose short position lifted 3.13ppt from 3.27% to 6.40%. The stock is positively regarded in the database, which reflects five Buy calls and two Holds. Yet while the database may reflect fairly positive broker sentiment, reading through the post AGM analyst commentary that came out at the end of October sees a growing amount of concern about the forward momentum of the business.

Rounding out the increase side of the ledger leaves us with Silver Lake Resources ((SLR)), another Short Report favourite. The company’s short position has advanced 2.57ppt from 5.21% to 7.78% over the monthly period. The database shows one Buy from JP Morgan, who noted at the end of October that Silver Lake quarterly production report was disappointing. On the other hand, the broker also said growth prospects for the company remain attractive and medium-term performance should also improve.

The decrease side is headed up by Aspen Group ((APZ)), its short position down 3.21ppt from 3.22% to 0.01% on a monthly basis. Last, but not least, is Industrea ((IDL)), whose short position has come off 2.1ppt from 2.50% to 0.4% over the month in question. The stock is neutrally regarded in the database, with one Hold call and one broker restricted. The company recently concluded a strategic review, the results of which were discussed at last week’s AGM.

Analysts at CIMB have been keeping a close eye on the short action in the market and have noticed that short positions in Flight Centre ((FLT)) have been somewhat covered over the past month, with short interest decreasing from 13.5% to 12.3%. The broker continues to like the valuation picture despite recent share price outperformance, believing the stock warrants a market multiple.

 

Top 20 Largest Short Positions

Rank	Symbol	Short Position	Total Product	%Short
1	JBH	21592366	98850643	21.84
2	FXJ	379388288	2351955725	16.13
3	MYR	87873099	583384551	15.06
4	ILU	57803353	418700517	13.81
5	FLT	12134115	100154646	12.12
6	LYC	211613390	1796159363	11.78
7	HVN	113649119	1062316784	10.70
8	TRS	2648713	26092220	10.15
9	DJS	53164817	531788775	10.00
10	COH	4998611	57026689	8.77
11	CSR	44250751	506000315	8.75
12	AWC	207344581	2440196187	8.50
13	PDN	70694493	836825651	8.45
14	SLR	17668776	225493476	7.84
15	MTS	65050271	880704786	7.39
16	MND	6565309	90663543	7.24
17	TEN	103277550	1437204873	7.19
18	BLD	54618095	766235816	7.13
19	WSA	12672382	179735899	7.05
20	SGT	10927265	155402627	7.03

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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