The Short Report

This story features ARISTOCRAT LEISURE LIMITED. For more info SHARE ANALYSIS: ALL

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By Andrew Nelson

As the year slowly draws to a close, shorting activity in the Australian Stock Market continues to wane, seeing little in the way of significant moves reported over the week of 21-28 November. The sluggish activity contrasts sharply with the fact that short positioning across the S&P/ASX 200 remains at near-record highs. As per usual, discretionary retailers and capital goods companies have continued to attract the majority of recent short selling attention.

There were three reductions and two increases greater that 1ppt reported by ASIC over the course of the week. The largest increase in short position was booked by copper, cobalt and gold explorer CuDeco ((CDU)), up 1.46ppt from 1.98% to 3.44%. Next on the increase side is shipbuilder Austal ((ASB)), whose short position ticked 1.06ppt higher from 0.22% to 1.28%.  

The decrease list was headed up by Singtel ((SGT)), with its short position pulling back 2.45ppt from 7% to 4.55%. Credit Suisse upgraded its call to Buy towards the end of November after turning more positive on the company’s Bharti business in India. Conversely, analysts at Macquarie maintained their Sell call last week, citing regulatory risks in India and margin pressure in Singapore. With four Buys and three Holds, the stock is positively regarded in the FNArena Database.

Short report regular Lynas Corp‘s ((LYC)) short position came off 2.03ppt from 12.08% to 10.05% over the week. Macquarie upgraded its call to Outperform from Underperform on the 23^rd of November, noting the first rare earth ore from WA had landed at the LAMP in Malaysia and was ready to be fed in by month's end. The upgrade pushed the stock back into positive territory, with two Buys, one Sell and two Holds recorded in the FNArena Database, which also shows more than 68% upside to the consensus price target.

The last significant weekly move was posted by Gryphon Minerals ((GRY)), with its short position down 1.52ppt from 5.64% to 4.12%.  The company boasts four straight Buys in the FNArena Database, although Citi rearranged its forecasts a few weeks back to reflect updated commodity price and FX assumptions, plus some capital raising dilution. There is currently 124% upside to the consensus target price.

The drop in SingTel’s short position was enough to see it fall off the 20 Most Shorted Stocks list, with Bradken ((BKN)) moving up a few notches to replace it. Other than that, there were a few minor position changes, one of the biggest being Lynas, who dropped from the number six to number nine spot.  

There were a few more mentions on the monthly movers list, with the short position of three stocks advancing more than 2ppt, while two stocks managed to book decreases of the same amount. The biggest monthly decrease was booked by Lynas Corp, whose short position is now down 2.33ppt from 12.38% to 10.05% over the course of the month, with much of the decrease booked in the last week of November.

Industrea ((IDL)) finds itself next on the list, with short positions being cleared up in advance of the company being taken over by GE Mining Services on the last day of November.

Bradken leads the monthly increases, its short position advancing 3.67ppt from 3.17% to 6.84%, enough to place it on the Top 20 list. The stock is very positively regarded in the FNArena Database, boasting five Buys and two Holds and 44% upside to the consensus price target.

The next largest monthly increase was booked by Linc Energy ((LNC)), its short position rising 3.47ppt from 2.81% to 6.28%. The company reported just a few days ago it had entered into a JV to develop coal gas projects in Sub-Saharan Africa.

Last but not least is CuDeco once again, its short position up 2.15ppt from 1.29% to 3.44%, with much of the increase booked during the last week of the month.

Analsysts at CIMB were as usual watching short levels across the market and note that shorts in Aristocrat Leisure ((ALL)) have been pretty much covered over the past couple of months, with short interest decreasing from 3.8% to around 2.7% currently. The  broker sees the stock as offering positive operating momentum, a good amount of excess capital, a good exposure to North America, while earnings are seen to be near trough and valuation metrics are undemanding. At least that’s what CIMB thinks.
 

Top 20 Largest Short Positions

Rank	Symbol	Short Position	Total Product	%Short
1	JBH	21306338	98850643	21.55
2	FXJ	367700052	2351955725	15.63
3	MYR	85584993	583384551	14.67
4	ILU	55158999	418700517	13.17
5	FLT	11697218	100154646	11.68
6	HVN	114440503	1062316784	10.77
7	DJS	55364827	531788775	10.41
8	TRS	2666723	26092220	10.22
9	LYC	190931168	1916159363	9.96
10	CSR	45317568	506000315	8.96
11	COH	4917509	57026689	8.62
12	PDN	71781605	836825651	8.58
13	AWC	196228892	2440196187	8.04
14	MTS	70755616	880704786	8.03
15	SLR	17669507	225493476	7.84
16	TEN	100520149	1437204873	6.99
17	WSA	12425059	179735899	6.91
18	MND	6199967	90663543	6.84
19	BKN	11460593	169240662	6.77
20	BLD	49365139	766235816	6.44

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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