The Short Report

This story features JB HI-FI LIMITED, and other companies. For more info SHARE ANALYSIS: JBH

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By Andrew Nelson

Shorting activity on the Australian market was pretty quiet over the week from 4-12 December, with traders now seemingly having decks cleared and hatches battened down ahead of the holiday break.

ASIC data show just two stocks booking a 2 percentage point (ppt) or greater move on a weekly basis, while there were only six stocks to do so over the month from 12-November to 12-October. Almost all of the activity was covering activity, with no stocks seeing a significant increase to its short position over the week, while just one significant increase was booked over the entire monthly period.

The biggest weekly increase was posted by Macmahon Holdings ((MAH)), its short position advancing 1.83ppt from just 0.6% to 2.43%. Last month, analysts at Macquarie cut their price target, noting the company had revised its earnings guidance for FY13 as part of a move to shrink the scale and complexity of its construction business to allow for better concentration on the growing mining business. Last week, Macquarie upgraded its call on Macmahon to Hold from Sell on news the company has been able to divest its construction businesses and raise an extra $80.7m in fresh capital. The stock boasts four straight Hold calls in the FNArena Database.

JB HiFi ((JBH)) experienced the biggest decrease in short position over the week, coming off 3.02ppt from 23% to 19.98%. Despite the lower short interest, JBH still comfortably remains the most shorted stock on the Australian market. Just yesterday analysts from Deutsche Bank noted the company needs to build sales in a new category, as software sales are drying up. The whitegoods category, which the company tentatively entered last month, is an unlikely contender, says Deutsche, given a number of issues from branding to space constraints. Most brokers have been sceptical about the move to whitegoods since it was announced back in November. The company is neutrally regarded in the database, with three Buys, three Sells and two Holds.

The other company to book a more than 2ppt move over the course of the week was Gindalbie Metals ((GBG)), whose short position declined 2.88ppt from 4.87% to 1.99%. The company reported early in the period that it was raising $62m, with most of the funds to go towards the Karara JV. The stock maintains a neutral footing in the database, with two Buys, two Sells and two Holds and 66% upside to the consensus price target. 

There was only one notable monthly increase as well. Shorts in Metcash ((MTS)) lifted 3.91ppt from 6.89% to 10.8% over the period. Fairly disappointing 1H results were reported early in the month, although Credit Suisse upgraded its recommendation to Outperform from Neutral on valuation grounds, believing all of the downside is now factored in to the price. Otherwise, JP Morgan (at Hold) noted the company is expected to continue doing it tough in the food and grocery distribution business, with sales declining and the outlook remaining challenging, while Franklins is turning out to be an expensive dud. On the other hand, JP Morgan also sees plenty of valuation support and believes the dividend yield will likely remain attractive, adding some extra share price support. The database shows positive sentiment for the stock, with two Buys, one Sell and five Holds.

There was a bit more action in the monthly decrease column, with Lynas Corp ((LYC)) down 4.68% from 12.62% to 7.94%. The stock remains positively regarded in the database, with two Buys, two Holds and a Sell. One of those Buy calls is from Macquarie, who upgraded from Sell a couple of weeks back noting the first rare earth ore from WA has landed at the LAMP in Malaysia and is ready to be fed in. The stock currently trades at a 71% discount to its consensus price target.

Fairfax ((FXJ)) is the next stock on the decrease list, its short position retreating 4.37ppt from 16.37% to 12% despite a slightly negative, but recently improved view on the stock. The database shows three Sells versus two Buys and two Holds, with Deutsche Bank upgrading to Hold yesterday on news the company is set to sell its 51% stake in TradeMe for $616m. Deutsche sees 3% EPS accretion in FY13 and some much needed balance sheet relief coming from the move. On the other hand, Credit Suisse re-initiated coverage on Fairfax with an Underperform rating three weeks ago, noting the company needs to generate additional revenue streams to support its flagging publishing operations over the medium-term.

CIMB has also paid some special attention to Fairfax this week, with the broker seeing an opportunity in the declining short interest levels. The broker quite liked the TradeMe news, noting proceeds from the sale will be used to pay down debt and secure the balance sheet, with some put aside for digital investment. The broker sees the move as significantly de-risking the business as well as providing support for the restructuring of the core business in advance of an anticipated cyclical improvement in the advertising market. An increased probability of capital management was also noted.

SingTel’s ((SGT)) short position was 4.32ppt smaller at 2.52%, with analysts at Macquarie last week lifting EPS forecasts for Indonesian Telco Telkomsel, and given Singtel owns 35% of the company, there were also upgrades to group numbers. Sentiment remains high, with the database showing four Buys and three Holds.

Mesoblast ((MSB)) saw its short position continue to decline, down 3.76ppt from 6.46% to  2.7%. Analyst sentiment remains positive, with the database showing two Buys, one Sell and one Hold and 27% upside to the consensus price target. BA-Merrill Lynch noted last month there is likely to be significant upside from phase III trials of the company’s Congestive Heart Failure treatment when it is eventually undertaken. Development partner Teva announced its R&D schedule last week and brokers were of mixed views in their interpretation. Deutsche Bank remained quite positive, saying Teva confirmed it will go ahead with its Phase 3 trial of  MSB’s mesenchymal precursor cell treatment for congestive Heart Failure sometime early next year. Macquarie, who sits at Sell, read the same report a little differently, believing the wording indicated some doubt about Teva’s commitment. For more information, you can read last week’s FNArena article: To Like Or Not Like Mesoblast?

The last short position change we’ll note this year is Gindalbie and given we’ve already covered their weekly move, all that needs saying is their short position was down 2.82ppt from 4.81% to 1.99% on a monthly basis.

There was only one compositional change to the Top 20 most shorted stocks list, with Western Areas ((WSA)) falling off the list from the number 17 spot and Wotif.com ((WTF)) climbing back into the list at the number 20 spot.

Top 20 Largest Short Positions

Rank	Symbol	Short Position	Total Product	%Short
1	JBH	20181286	98850643	20.42
2	MYR	88206675	583384551	15.12
3	ILU	60464852	418700517	14.44
4	FLT	11974890	100160128	11.96
5	FXJ	278686284	2351955725	11.85
6	HVN	118300775	1062316784	11.14
7	DJS	57576164	531788775	10.83
8	MTS	91654820	880704786	10.41
9	TRS	2643029	26092220	10.13
10	PDN	75120151	836825651	8.98
11	LYC	165084896	1916159363	8.62
12	COH	4876443	57026689	8.55
13	CSR	42712154	506000315	8.44
14	SLR	17898504	225493476	7.94
15	AWC	172423915	2440196187	7.07
16	MND	6232537	90663543	6.87
17	BKN	11226361	169240662	6.63
18	LNC	33390804	504487631	6.62
19	TEN	94905567	1437204873	6.60
20	WTF	13936920	211736244	6.58

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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