The Short Report

This story features ISHARES ASIA 50 ETF CDI, and other companies. For more info SHARE ANALYSIS: IAA

By Andrew Nelson

Shorting activity settled down a little in the week from the 30^th of January to the 6^th of February. There was just one stock that saw its short position increase significantly -by two percentage points (ppt) or more- while there were quite literally none to the downside. There were a few more significant moves over the month to 6 February, with six increases and three decreases on a monthly basis.

This week’s report leads off with GUD Holdings ((GUD)), whose short position increased 2.01ppt from 3.83% to 5.84% over the course of the week in question. It’s been a few weeks since brokers reviewed the interim result and opinions were fairly consistent: it was a good enough result top-line given cost control efforts, but brokers were pretty much unanimously concerned about the softening macro outlook and the increasing weakness in the company’s flagship Sunbeam operation. The stock garners a negative sentiment on five Holds and one Sell in the FNArena database.

Next stock in the queue, SingTel ((SGT)), saw its short position lifting 1.88ppt from 4.08% to 5.96%. The company did sell its stake in loss-making Pakistani associate Warid Telecom the week before and the move was seen as a sound one by most in the market, while Moody’s also confirmed the sale would be “credit positive”. There has been no change to the company’s positive footing in the database, with four Buys and three Holds ensuring a positive sentiment read.

The biggest weekly decrease in short position was booked by the iShares S&P Asia50 exchange traded fund ((IAA)), which was down 1.17ppt from 1.35% to 0.18%.

There was a bit more action on a monthly basis, with Silver Lake Resource’s ((SLR)) short position coming off 7.84ppt from 8.23% to 0.39. However, this move is the same as last week’s and the week before, with the Integra Mining merger ((IGR)) now put to bed a month ago. Deutsche Bank picked up coverage last week with a Buy call, noting that post the merger the company has become a significant gold producer offering significant valuation upside on exploration potential and a positive gold outlook. Sentiment is positive on two Buys and a Hold, with 21% upside to the consensus price target.

Next, Linc Energy ((LNC)) saw its short position come off 2.12ppt from 5.37% to 3.25%. Meanwhile, shorts in Primary Healthcare ((PRY)) declined 2.09ppt from 5.4% to 3.31%, with brokers almost unanimously positive on last week’s 1H result. Macquarie was wet blanket, pointing out there's a growing gap between actual cash flows and reported net profits, which means dividends are now just barely covered by generated cash. While no one’s likely to notice any time soon, the broker predicts there will be a day of reckoning and when it arrives, the stock will be quickly de-rated. In the meantime, Primary maintains a positive sentiment footing in the database on four Buys, three Holds and a Sell.

Because it was close to the “significant” cut-off, we’ll also give a mention to Wotif.com ((WTF)) in this week’s report. Shorts in the on-line travel retailer were down 1.97ppt from 7.13% to 5.16%. The only broker action on the stock last week came from Credit Suisse, who downgraded its call to Hold from Buy on the back of recent share price outperformance and on the view the stock is looking pretty fairly valued at current levels, with risks to the up and downside finely balanced at the moment. The stock moved a little deeper into negative sentiment territory on the downgrade, with six Holds and two Sells recorded.

GUD sits atop the list of monthly increases as well, its short position up 3.85ppt from 1.99% to 5.84%. Out next contestant is Paladin Energy ((PDN)), with most brokers positive on valuation grounds and the company’s competitive positioning, but also extremely concerned about a lacklustre and fairly opaque uranium spot market. Shorts in the yellow cake miner are up 2.9ppt from 10.3% to 13.2%. SingTel, which we’ve already discussed, is up 2.84ppt from 3.12% to 5.96% on a monthly basis.

Shorts in Kingsgate Consolidated ((KCN)) were up 2.36ppt from 5.37% to 7.73% over the month in question. Citi downgraded its call to Hold in late January on a too high share price, otherwise believing the company was on track to hit FY targets. A few days later Macquarie came out and said it sees potential downside risk to production in the second half and downgraded FY13 earnings by around 14%. No surprise that the latter broker sits at Sell. Overall sentiment is negative, with three Holds and Macquarie’s Sell on show in the database.

Lynas Corp ((LYC)) made sure of its regular weekly inclusion, its short position advancing 2.28ppt from 6.79% to 9.07% over the month. JP Morgan summed up the view on Lynas in a report from a week ago, saying it expects a re-rating will occur in the months ahead as the Malaysian project de-risks and the threat of regulatory action diminishes. Otherwise, there is no change to the positive sentiment skew in the database, with shares offering almost 40% upside to the consensus price target.

Last, but by no mean least is SMS Management & Technology ((SMX)), whose short position has advanced 2.02ppt from 1.7% to 3.72% over the month in question. Last week analysts at CIMB cut FY13-14 EPS forecasts by 7% and 14% on negative momentum in end markets and negative revisions to both utilisation and billable headcount assumptions. The same day UBS cut earnings estimates by 5% for FY13 and FY14, believing fourth quarter conditions deteriorated compared with guidance at the AGM. There were no changes to recommendations, so the database continues to show straight Holds.

Changes to the Top 20 most shorted list are minimal. There were a few minor position changes, the biggest of which was a move from the five to seven slot by Flight Centre ((FLT)). Also, Kingsgate fell from the seventeen position to off the list, which left room for Alumina ((AWC)) to join at the number seventeen spot on a total short position of 6.96%.
 

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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