The Short Report

This story features ANSELL LIMITED, and other companies. For more info SHARE ANALYSIS: ANN

By Andrew Nelson

As reporting season continues, shorting and short covering on the Australian stock market continues to slow. Over the week from the 13-20 February, just three stocks saw their short positions move more than 1 percentage point (ppt), while on a monthly basis; just eight stocks booked a significant move of 2ppt or more.

Ansell ((ANN)) was the only stock whose short position increased by more than one ppt over the course of the week, rising 1.33ppt from 3.77% to 5.10%. It was a busy week for the company, with 1H results falling well short of consensus, disappointing brokers across the board and encouraging analysts at both Macquarie and Citi to cut their recommendation to Hold from Buy. The miss was a watershed moment for Citi, the broker walking away from the report with a vastly shifted opinion, one that has gone from seeing risks to the upside to now seeing risks to the downside.

Shorts in Alumina ((AWC)) came off 2.18ppt from 6.94% to 4.76%. There was little broker chatter over the week, but right afterwards the company reported what turned out to be an in-line FY loss that saw Credit Suisse upgrade its recommendation to Hold, while Macquarie downgraded to Hold…on valuation grounds. Bathurst Resources ((BTU)) pulled back 1.75ppt from 5.89% to 4.14%. A little earlier in the month the company’s December quarter sales result beat Credit Suisse by 20% on a 54% quarter on quarter increase.

There was a bit more movement to speak of in monthly terms, although significant moves to the downside were limited to just one, Alumina, which dropped 2.33ppt from 7.09% to 4.76% on a monthly basis.

There were a fair few more increases over the month, the biggest of which was posted by Optus owner SingTel ((SGT)). Shorts in the Asian Telco advanced 4.27ppt from 2.29% to 6.58%. Earlier in the month the company reported 3Q numbers that disappointed for the most part. Both BA-Merrill Lynch and Macquarie are troubled by an underperforming Optus.

Shorts in GUD Holdings ((GUD)) were up 3.24ppt from 2.22% to 5.46%. While not germane to the period in question, last week the company put out interim results that were mixed. There were no downgrades and only some minor forecast fiddling, but brokers are growing increasingly concerned about the performance, or lack thereof, of the company’s main earnings driver, the Sunbeam division.

Kingsgate Consolidated ((KCN)) maintained its spot on the monthly list, with shorts up 2.9ppt from 6.07% to 8.97%. Things could well reverse a little for the stock, with the company reporting 1H results that came in a little bit ahead of the market. BA-ML remained at Sell, concerned about the perceived risks to production from the Challenger mine if higher grade ore is delayed. Meanwhile, Citi upgraded its call to Buy, noting recent share price weakness and the fact the company is on track to meet its FY13 production guidance.

Ansell is next on the list, with shorts rising 2.46ppt from 2.64% to 5.1%. Next comes SMS Management ((SMX)), it short position having increased 2.19ppt from 1.82% to 4.01%. 1H results were released last week and while not a good set of numbers, at least they were in line with fairly low expectations. The outlook is subdued and one gets the impression a number of brokers are now close to the downgrade line.

Shopping Centres Australia ((SCP)) saw its short position slowly advance to be up 2.1ppt from 1.34% to 3.44% on a monthly basis. Deutsche Bank picked up coverage with a Sell call early in the month, saying that despite the security offered by major leaseholder Woolworths ((WOW)), the company is still looking at some distinct growth challenges, while also looking a bit expensive versus peer averages.

Lastly, shorts in Gryphon Minerals ((GRY)) have advanced 2.09ppt from 4.35% to 6.44%. At the beginning of February the company released its bankable feasibility study for the Banfora project and while the numbers saw Macquarie reduce its price target to 90c from $1.50 on incorporating the study's metrics, the broker none the less continues to see upside for the share price. The next key steps to delivering value will be a demonstration of the ability to fund the project, via a mix of cash on hand, debt and equity, says Macquarie.

As far as the Top 20 Most Shorted stocks in the market list goes, there were a few minor position changes, the biggest of which was Metcash ((MTS)) moving from the 6^th to 9^th spot. There were several changes to composition, with Alumina, Bradken ((BKN)) and Gunns ((GNS)) all falling off the bottom end of the list, with Mesoblast ((MSB)), SingTel, and Gryphon signing on to replace them.

Top 20 Largest Short Positions

Rank	Symbol	Short Position	Total Product	%Short
1	JBH	18658971	98850643	18.88
2	FXJ	377032668	2351955725	16.03
3	ILU	60552125	418700517	14.46
4	MYR	79825937	583384551	13.68
5	PDN	106497996	836825651	12.73
6	DJS	62047978	531788775	11.67
7	FLT	11212562	100170726	11.19
8	HVN	118280586	1062316784	11.13
9	MTS	96888258	880704786	11.00
10	CSR	48734797	506000315	9.63
11	LYC	184894619	1960801292	9.43
12	TRS	2460654	26092220	9.43
13	KCN	13592670	151828173	8.95
14	MND	7830856	90663543	8.64
15	ACR	13733685	166496711	8.25
16	COH	4025761	57026689	7.06
17	WSA	13244570	196843803	6.73
18	SGT	10771271	164748297	6.54
19	GRY	25442728	400464983	6.35
20	MSB	17972732	287840322	6.24

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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