The Short Report

This story features PALADIN ENERGY LIMITED, and other companies. For more info SHARE ANALYSIS: PDN

By Andrew Nelson

Shorting activity on the Australian stock market over the week from 15-22 January 2013 pretty much kept pace with the week prior. Not a bust week, but not a dead week either. As usual, shorting and short covering over the most recent period occurred the most in the mining and discretionary sectors, although REITS and fund managers also feature in this week’s report.

We’ll start off our coverage with Perpetual ((PPT)), whose short position increased by 3.04 percentage points (ppt) from 1.97% to 5.01%. Citi upgraded its forecasts for Perpetual over the period on a marking to market, but otherwise maintained its Hold call. Last week Macquarie and JP Morgan, both also at Hold, reviewed the stock as well. Macquarie actually lifted FY13-15 EPS forecasts by 13.6%, 21.4% and 19.6% to reflect recent positive market performance. JP Morgan was a little more cautious, as while the broker lifted forecasts for the same reason as Macquarie, it remains mindful that the company continues to post fund outflows, not inflows. The stock is just shy of being neutrally regarded, with six Holds and one Sell in the FNArena Database.

Astro Japan Property Trust ((AJA)) finds itself next in our coverage, the stock increasing its short position by 2.55ppt from 0% to 2.55%. BA-Merrill Lynch reported last week the company has locked in its debt profile for the next two to five years, significantly reducing debt levels. With 15% upside to the consensus price target and straight Buys in the database, the stock maintains a perfect sentiment level.

The contingent value rights issued by Yancoal ((YAL)), or ASX security code YALN.AX, were shorted by a further 2.39ppt from 0.1% to 2.49. Sentiment for the underlying stock remains negative, with Credit Suisse and BA-Merrill Lynch (both at Sell) shrugging off a strong December quarter result last week to focus on project delays, high costs, high gearing and low liquidity. Note that such shorting of derivatives can often imply a hedge trade against the underlying.

On the decrease side of the weekly ledger sits regular increaser Myer ((MYR)), whose short position has bucked the more regular discretionary trend to pull back 2.26ppt from 13.58% to 11.32%. David Jones ((DJS)) also joined the party, its short position coming off 2.25ppt from 11.41% to 9.16%. While Myer retains a slightly positive sentiment bias on the three Buys, three Holds and two Sells in the database; David Jones is another story on its decidedly negative five Holds and three Sells.

Last on the weekly list is the seemingly ever present Linc Energy ((LNC)), its short position down 2.08ppt from 4.94% to 2.86%. The company announced a few weeks back it had partnered with DTEK Oil and Gas to evaluate underground coal gasification potential in the Ukraine.  While not moving more than 2ppt, we’ll highlight Monadelphous ((MND)), with its short position declining by 1.27ppt from 7.6% to 6.33%. Shares maintained their slightly positive bias in the database, with two Buys, four Holds and one Sell recorded.

There were also only two significant movers to the downside on a monthly basis. Silver Lake ((SLR)) gets the top mention, its short position down 10.33ppt from 10.63% to 0.30. With Silver Lake now merged with Integra Mining ((IGR)) and off the market, the count should drop to zero soon enough.

Next on our monthly decrease list is Myer again, its overall short position coming off 2.25ppt from 13.57% to 11.32% with most of the push coming from last week. Fellow retailer JB HiFi ((JBH)) maintained its spot on the monthly decrease list, down 1.66ppt from 20.18% to 18.52%, although neither move is enough to shift JBH from being the most shorted stock on the market, while Myer has hung on to its top five position.

Paladin Energy ((PDN)) booked the largest monthly increase to its short position, up 4.27pt from 8.02% to 12.29%. The company reported well received quarterly numbers last week and while they did inspire a few earnings and target price upgrades, a near universally pessimistic outlook for short to mid-term uranium prices keeps brokers on a cautious footing. Still, the stock maintains a slightly positive sentiment bias in the FNArena Database, with two Buys, three holds and a Sell on offer. There is also a little more than 25% upside to the consensus price target.

Fairfax ((FXJ)) booked the second biggest increase to its monthly short position, lifting 3.03ppt from 12.68% to 15.71%. Sentiment remains slightly to the negative, with two Buys, three Holds and three Sells on show in the database. Next on the list is Astro Japan Property Trust, which is up the same amount on a monthly basis as it is on the weekly basis we discussed above. 

Lastly there’s Kingsgate Consolidated ((KCN)), whose short position has climbed 1.99ppt from 4.25% to 5.24% over the month to 22 January. While not relevant to the period in question, both BA-Merrill Lynch and Citi have recently put out notes on the stock. Citi downgraded its call to Neutral from Buy on valuation grounds, otherwise believing the company remains on track to hit FY targets, while also noting potential upside to come from the new Chatree Plant 2 license and the prospect of a Thai IPO. BA-ML is not so rosy, sitting at Sell and otherwise seeing plenty of potential downside risk to production in the second half. The stock maintains a negative bias in the database, with three Holds and one Sell on record.

The overall Top 20 list of the most shorted stocks in the Australian market shows only a few minor position changes and just one change to overall composition. Mesoblast ((MSB)) finds its way out of the Top 20 to be replaced by Kingsgate, which joins the list at the number twenty spot.
 

Top 20 Largest Short Positions

Rank	Symbol	Short Position	Total Product	%Short
1	JBH	17730442	98850643	17.94
2	ILU	61724048	418700517	14.74
3	MYR	81140447	583384551	13.91
4	FXJ	324773371	2351955725	13.81
5	FLT	12328550	100165616	12.31
6	PDN	102957811	836825651	12.30
7	DJS	60331248	531788775	11.34
8	HVN	119641623	1062316784	11.26
9	MTS	91136509	880704786	10.35
10	TRS	2549192	26092220	9.77
11	CSR	42983136	506000315	8.49
12	COH	4780260	57026689	8.38
13	MND	7053690	90663543	7.78
14	LYC	149219991	1960801292	7.61
15	ACR	12594836	166496711	7.56
16	BKN	11621312	169240662	6.87
17	AWC	167137925	2440196187	6.85
18	WTF	14047722	211736244	6.63
19	WSA	12232689	192893794	6.34
20	KCN	9502163	151828173	6.26

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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