The Short Report

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

By Andrew Nelson

The shorting and short covering of equities on the Australian market remained at fairly sedate levels in the week from the 6th to the 13th of March. Just two stocks saw their short positions come off by more than 2 percentage points (ppt) over the week, while only one stock saw its short interest increase by more than 1ppt.

Analysts from CIMB report that shorting interest has increased a bit across the gold sector. The broker notes two driving factors for this: a run of weak operating performances booked over the February reporting season and a macro trade out of gold on signs of a building US recovery. Gold is not alone, with the broker also noting that shorting has picked up in infrastructure and steel, while levels are still high in discretionary retail.

Media stocks are moving the other way, with CIMB noting a decrease in shorts over the past few weeks, while short covering has also been noticed in the transport, energy and building materials sectors.

The biggest increase to a short position over the week in question was booked by Billabong ((BBG)), with shorts lifting a fairly subdued 1.04ppt from 1.81% to 2.85%. CIMB downgraded its call on the stock towards the end of February, noting if the company is not bought it will be forced into yet another capital raising, a likely unpalatable proposition for the board. The broker also sees limited upside prospects, pointing out the company's main sources of disappointment, Europe and the Nixon JV, are unlikely to recover in the medium term. Sentiment in the FNArena Database shows a negative skew for Billabong.

Shorts in Slater and Gordon ((SGH)) came off 2.82ppt from 2.84% to 0.02%. The stock did exactly the opposite last week when shorts went up 2.82ppt from 0.02% to 2.84%. The company’s 1H report at the end of February 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 still neutral.

Sundance Energy ((SEA)) saw its short position decline by 2.52ppt from 3.51% to 0.99%. BA-Merrill Lynch was upbeat on news last week the company had bought 7,812 acres in the volatile oil area of the Eagle Ford at a good price. The broker thinks the purchase will form the core of Sundance's ramping up of production to 5,000 barrels of oil equivalent per day (boepd) over the next 15 months and sees plenty of further upside potential. Sentiment for the stock is positive.

Even though the move was less than the normal 2% for inclusion, we’ll give a mention to SingTel ((SGT)), its short position down 1.78ppt from 3.96% to 2.18% after coming off by a similar amount last week. BA-Merrill Lynch noted just last week that the company had announced a strategic review for Optus' satellite business, with optimising share holder value the company's stated goal. BA-Merrill Lynch points out this could end up turning into a 2%-6% special dividend if the holdings are sold down or listed. Sentiment is positive for the stock.

That brings us to the monthly movers table, which holds a bit more to discuss. Shorts in Macquarie Atlas Roads ((MQA)) are up by 2.54ppt from 0.88% to 3.42%, UBS noting at the beginning of March the stock had underperformed since the February result. In the broker's opinion, the market is favouring the extrapolation of a low short-term dividend yield and ignoring the cash flow implications of one-offs in FY12-13, particularly from Eiffarie. Sentiment is positive.

Shorts in Alumina ((AWC)) are down 2.21ppt from 6.94% to 4.73% over the month in question. The last run of broker commentary on the stock was over the last week of February, post the FY report. Credit Suisse upgraded to Hold, saying the loss was not as bad as expected and the outlook remains similar, i.e. CS is still pencilling in a modest improvement this year. BA-Merrill Lynch, at Buy, sees a big increase in bauxite imports to China coming given the Indonesian ban from 2014 likely to leave China short of bauxite. Sentiment for Alumina is positive.

Harvey Norman ((HVN)) saw its short position retrace 2.13ppt from 10.73% to 8.6%. Brokers all reviewed the company’s 1H result at the beginning of this month and the general opinion was that it was not as bad as feared. JP Morgan even ventured that January sales were strong, although it is nowhere near convinced the company’s outlook is mending. The opinion was echoed by Macquarie, who in not at all convinced by the company performance, but is increasingly expecting a retail recovery at some point down the track. Broker sentiment for Harvey Norman is negative.

Our last significant monthly moves were posted by Bathurst Resources ((BTU)) and Sundance Energy. Shorts in Sundance were down 1.96ppt from 2.95% to 0.99% over the course of the month in question, while Bathurst was down 2.01ppt from 5.89% to 3.88%. Credit Suisse noted back at the beginning of February that Bathurst’s December quarter sales beat the broker by 20% on a 54% quarter on quarter increase, with an improvement in Takitimu thermal coal sales delivering the upside. The broker did have to push back first production from Escarpment by nine months or so, which means another net loss is expected in FY13. Still, the change did little to affect the broker’s overall case and Outperform call. Sentiment for the stock is positive on straight buys in the FNArena Database.

Changes to the Top 20 most shorted stocks list are very few in number. There were three or four position swaps, but none more than a position or two, while there was only one change to the list’s composition. Gryphon Minerals ((GRY)) dropped off the list from the number seventeen spot, while Gunns ((GNS)) has joined at number 20.

Lastly, analysts from CIMB are seeing some good opportunity being provided by Seek ((SEK)). The broker notes shorts have dropped 1.3% from a six-month high of 6.2%, while the risk of a big earnings downgrade is fading. The broker now expects a strong earnings bounce at some point as employment conditions improve.

 

Top 20 Largest Short Positions

Rank	Symbol	Short Position	Total Product	%Short
1	JBH	19196994	98947309	19.40
2	FXJ	386277666	2351955725	16.42
3	ILU	60237740	418700517	14.39
4	MYR	77395244	583384551	13.27
5	PDN	101426631	836969286	12.12
6	DJS	61777652	531788775	11.62
7	FLT	11218000	100289792	11.19
8	MTS	92706460	880704786	10.53
9	LYC	194072954	1960801292	9.90
10	MND	8170746	90663543	9.01
11	KCN	13637392	151828173	8.98
12	TRS	2322180	26092220	8.90
13	CSR	44760256	506000315	8.85
14	HVN	91965801	1062316784	8.66
15	COH	4525373	57040932	7.93
16	ACR	11543647	166521711	6.93
17	BRU	18653382	273912685	6.81
18	BKN	11464211	169240662	6.77
19	WSA	13250115	196843803	6.73
20	GNS	52741216	848401559	6.22

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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