The Short Report

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By Andrew Nelson

The Week from the 20th and 27th of February was another subdued one for shorting and short covering activity on the Australian share market. There were just two stocks that saw their short position increase or decrease by more than one percentage point (ppt) on a weekly basis, while there were seven stocks that saw their short position move by more than 2ppt on a monthly basis.

Shorts in Australian satellite operator NewSat ((NWT)) increased 1.36ppt from 0.03% to 1.39% after news the company had finally secured the $US600m in funding it needs to launch Australia's first independently owned commercial satellite. Now only one obstacle remains, the 2015 liftoff: CEO Adrian Ballintine claims the company will eventually be generating over $3.5bn of revenue with an 80% margin for 15 years.

Cochlear ((COH)) saw its short position advance 1.05ppt from 7% to 8.05%. The 1H result at the beginning of last month was not a good one and saw one of the last two fence sitters downgrade to Sell. The broker made the call on one big issue, a flat earnings growth outlook until at least FY15 versus a very high multiple. The only broker left not at Sell is BA-Merrill Lynch, its Hold call supported by a valuation premium to account for lower regulatory risk and higher competitive barriers to entry. One Hold call doesn't make much of a dent in the other seven Sell calls in the FNArena Database, meaning the stock maintains a very low level of sentiment.

Not one stock saw its short position come off by more than 1ppt, but Transpacific ((TPI)) was close, shorts slipping 0.97ppt from 1.6% to 0.63%. Macquarie upgraded its call to Buy from Hold over the week in question, encouraged by the modest improvement in the company's earnings trajectory. The broker saw slow but steady progress in improving operations in the 1H result. Sentiment for the stock remains positive.

There was a bit more action on a monthly basis. SingTel ((SGT)) led the charge, its short position rising 3.27ppt from 3.22% to 6.49%. Citi noted in mid-February that the company's 3Q report missed the market by 4% given the ongoing difficulties being faced by the Singapore business and unfavourable currency movements. The broker is also feeling cautious given the uncertainties that are still on the radar via Australia's potentially expensive LTE spectrum auction.

Shorts in Ansell ((ANN)) were up 2.6ppt from 2.68% to 5.28%. Both Citi and Macquarie downgraded their calls to Hold from Buy in mid-February. Macquarie noted growth needs to turn around 39% to hit FY guidance. Given the doubts about delivering this via a strong second half, Macquarie did not see upside at current trading levels. Citi walked away from the report with a vastly shifted opinion, one that has gone from seeing risks to the upside to seeing risks to the downside. Sentiment has moved to negative post the mid-February downgrades.

Fleetwood Corp ((FWD)) saw it short position lift 2.24ppt from 2.95% to 5.19% after reporting a weaker than expected 1H result towards the latter end of February. Credit Suisse, currently at Sell, said the weak first half result should turn out to be the low point in profitability. The broker nonetheless maintains there are still risks given the operating outlook.

Shorts in GUD Holdings ((GUD)) were up 2.16ppt from 3.31% to 5.47%. The company delivered a ho-hum result back at the end of January. Sentiment remains in negative territory. Shopping Centres Australia ((SCP)) saw its shorts rise 2.11% over the month, moving from 1.57% to 3.68%. Deutsche Bank picked up coverage on the stock last month with a Sell call, feeling that despite the security offered by major leaseholder Woolworths ((WOW)), the company is still looking at some distinct growth challenges.

Gryphon Minerals ((GRY)) was up 2.03ppt from 4.73% to 6.76%. The stock shows perfect sentiment in the database, with Macquarie noting last month the company had released its bankable feasibility study for Banfora. The study confirmed solid start-up expectations and thus the broker sees ongoing 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, said Macquarie.

Just one stock saw its short position pull back by more than 2ppt on a monthly basis. The winner is Alumina ((AWC)), shorts coming off 2.32ppt from 6.77% to 4.45%. The last week of February was a busy one for the stock, with Credit Suisse upgrading its recommendation to Hold and Macquarie downgrading to Hold. Macquarie noted that while the company's placement did fix the balance sheet, the company still posted a $53m loss and declared no dividend. Guidance is flat and despite the lower gearing, AWC may still look to offload assets. Sentiment has hung on to a positive footing.

The Top 20 most shorted stocks in the market list looks almost unchanged. There were a couple of minor position swaps, while Mesoblast ((MSB)) has dropped off the list from the number 20 spot, replaced by Buru Energy ((BRU)).

 

Top 20 Largest Short Positions

Rank	Symbol	Short Position	Total Product	%Short
1	JBH	19243849	98893976	19.46
2	FXJ	395670156	2351955725	16.82
3	ILU	61109638	418700517	14.60
4	MYR	78026129	583384551	13.37
5	PDN	111196044	836969286	13.29
6	DJS	61906004	531788775	11.64
7	MTS	95623592	880704786	10.86
8	FLT	10872616	100170726	10.85
9	HVN	102834981	1062316784	9.68
10	LYC	188919717	1960801292	9.63
11	CSR	47399207	506000315	9.37
12	TRS	2344550	26092220	8.99
13	KCN	13190579	151828173	8.69
14	MND	7713660	90663543	8.51
15	ACR	13414349	166496711	8.06
16	COH	4239704	57032519	7.43
17	GRY	26915421	400464983	6.72
18	WSA	12914714	196843803	6.56
19	SGT	10733258	164748297	6.51
20	BRU	17790182	273912685	6.49

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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