The Short Report

This story features SLATER & GORDON LIMITED, and other companies. For more info SHARE ANALYSIS: SGH

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By Andrew Nelson

Shorting and short covering of stocks in the Australian market remained subdued over the period from the 27th of February to the 6th of March. Activity seems to be spread across a range of sectors, although there was some consistent covering across a number of the more heavily shorted stocks.

Analysts at CIMB are continuing to see an increase to shorts across the gold sector. The broker suspects short sellers are taking advantage of what was a weak run of reported operating performances, while it also notes there is a macro shift out of gold occurring on the back of growing signs of a US recovery.

The broker also points out that infrastructure, energy, transport and to lesser extent steel stocks are all under a bit of shorting pressure, while pressure remains elevated in the discretionary sector as well. The covering that is going on is centred on the media, financials and building materials sectors.

The biggest short increase over the week was recorded by law firm Slater & Gordon ((SGH)), its short position increasing by 2.82 percentage points (ppt) from 0.02% to 2.84%. The company’s 1H report at the end of last month came in ahead of expectations on both the earnings and dividend lines. The beat was enough to see Macquarie lift its earnings forecasts. The broker did keep its Hold call in place, citing a pretty affordable looking valuation that is offset by the unpredictability of cashflow conversion in the litigation game. Sentiment for the stock in the FNArena Database is neutral.

Shorts in Caltex ((CTX)) climbed 1ppt higher from 1.01% to 2.01%. The last week of February was a busy one for the company, upgraded to Buy from Sell by Credit Suisse and downgraded to Sell by Macquarie. CS thinks the market is failing to properly value the reliable earnings stream on offer and is also failing to appreciate that by 2015 refining will only account for less than 5% of earnings. Macquarie blamed increased competitive pressures, balance sheet pressures, a weakening domestic economy and strength in refining that will likely prove temporary. Sentiment for the stock sits in negative territory.

Shorts in SingTel ((SGT)) came off 2.53ppt from 6.49% to 3.96%, with the market starting to forget about the 3Q miss booked mid last month. Sentiment for the stock remains positive. Harvey Norman ((HVN)) saw its short position pull back by 1.17ppt from 9.69% to 8.52%. The first half result came in better than expected, enough to see a formerly negative Macquarie upgrade its call to Neutral. The broker postulated that the market is now looking through to a retail recovery down the track. Broker sentiment for the stock is negative.

The last move of 1ppt or more posted on a weekly basis was booked by Paladin Energy ((PDN)), with shorts dropping 1.02ppt from 13.32% to 12.3%. Brokers were mixed on February’s result, but even BA-Merrill Lynch, who is sitting at Sell, expects uranium prices to improve in the second half and supply to move to a deficit by the end of 2014. Sentiment for the stock is positive.

There was also a decent amount of movement over the month to the 6th of March. The biggest increase to short position on a monthly basis was booked by Slater & Gordon, up the same 2.82 percentage points (ppt) from 0.02% to 2.84% mentioned above.

The only other significant (more than 2ppt) increase on a monthly basis was posted by Ansell ((ANN)). Shorts increased by 2.15ppt from 3.27% to 5.42%. The stock came under some pressure in mid-February, with both Citi and Macquarie downgrading their recommendations to Hold on the back of a broadly disliked 1H result. In fact, Citi walked 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. Citi now thinks the company’s FY guidance is a stretch and with growth estimates tempered, the current valuation now looks about right. After the downgrades, broker sentiment has shifted to the negative side of the ledger.

Alumina ((AWC)) has seen its short position decline by 2.25ppt from 6.94% to 4.69%. The end of February was also a busy time for the company. The stock was upgraded to Hold by Credit Suisse and downgraded to Hold by Macquarie. CS liked the look of the FY result and also noted a substantial fall in the share price. Macquarie still likes the general alumina (the commodity) story, but thinks shares have run far enough. Sentiment is positive in the database.

The last monthly mention is SingTel, with shorts pulling back by 2ppt from 5.96% to 3.96% over the month in question.

CIMB is starting to pay attention to the rising short interest in UGL ((UGL)), which spiked by 1.1% within three days of the release of a disappointing 1H result on the 27th of February. Lower-than-expected cash flow and falling margins across the business are what troubled the broker. CIMB also notes there has been a string of issues over the past year and a half that has caused some reputational damage and a decline in project-based revenue. Conversely, Deutsche Bank upgraded to Buy last week saying that despite slowing end markets, there is an emerging attractive risk-reward proposition.

 

Top 20 Largest Short Positions

Rank	Symbol	Short Position	Total Product	%Short
1	JBH	19538353	98893976	19.76
2	FXJ	384748636	2351955725	16.36
3	ILU	59947142	418700517	14.32
4	MYR	78248192	583384551	13.41
5	PDN	102905681	836969286	12.30
6	DJS	61607841	531788775	11.59
7	FLT	10986873	100219792	10.96
8	MTS	94337543	880704786	10.71
9	LYC	194451481	1960801292	9.92
10	TRS	2407582	26092220	9.23
11	KCN	13901802	151828173	9.16
12	CSR	45240890	506000315	8.94
13	HVN	90496600	1062316784	8.52
14	MND	7505521	90663543	8.28
15	ACR	13101895	166496711	7.87
16	COH	4176528	57040932	7.32
17	GRY	28155641	400464983	7.03
18	BKN	11473331	169240662	6.78
19	BRU	18490574	273912685	6.75
20	WSA	12867211	196843803	6.54

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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