The Short Report

This story features SIMS LIMITED, and other companies. For more info SHARE ANALYSIS: SGM

By Andrew Nelson

It was a slow but steady week for shorting activity on the Australian share market over the seven days from the 13^th to the 20^th of March. Just three stocks saw their short position increase by more than 1 percentage point (ppt), while only two stocks were lower by that amount over the period.

Iluka ((ILU)) leads off today’s report, its short position advancing 1.78ppt from 14.2% to 15.98%, with the stock maintaining its spot as the third most shorted stock on the Australian market. JP Morgan lowered its zircon price assumptions a few weeks back given the need for some significant de-stocking across the sector. Forecasts and the price target price were trimmed, but despite the near term woes of poor pricing conditions, the broker still sees upside, noting a number of industry participants have started to talk about improving market conditions. The broker thinks as soon as we see some evidence of a pickup in zircon prices, we’ll start to see some short-covering of the stock. The FNArena Database Sentiment Indicator shows the stock is positively regarded.

Shorts in Atlas Iron ((AGO)) were up 1.24ppt from 1.34% to 2.58%. Macquarie upgraded to Buy from Sell a couple of weeks ago, while UBS also moved up to Buy at the end of February on the view some sort of infrastructure solution will eventually materialise between players in the Pilbara region. This in turn means Atlas will eventually get Horizon2 up and running, at some stage. Sentiment is positive for the stock.

Wotif.com ((WTF)) saw its shorts rise by 1.08ppt from 5.76% to 6.84%. We haven’t heard from brokers since the end of February, when 1H results broadly disappointed and saw Credit Suisse cut its call to Sell. The broker is of the view that investors have priced in all the upside from increased commissions, while ignoring the downside risks, which is unfortunate given the downside is beckoning. Sentiment for the stock is negative.

Gryphon Minerals ((GRY)) saw its short position pullback by 2.48ppt from 5.61% to 3.13% over the week in question. Credit Suisse shrugged off the $1.1m first half loss, noting its focus is squarely on the funding of Banfora. A formal financing process is continuing with arrangements expected to be in place by the September quarter. Analysts at Macquarie also think the next key steps will be the funding the project, probably via a mix of cash on hand, debt and equity. Sentiment for the stock is perfect on four Buys.

Our last significant weekly mover is SingTel ((SGT)), with shorts 1.46ppt lower from 2.18% to 0.72%. BA-Merrill Lynch notes SingTel has announced a strategic review for Optus' satellite business, with optimizing share holder value the company's stated goal. The broker points out this could end up turning into a 2%-6% special dividend if the holdings are sold down or listed. Sentiment for SingTel is positive.

There are a few significant monthly movers as well, with two stocks increasing their short position by 2ppt or more, while four stocks saw their short positions covered by the same amount or more over the month to the 20^th of March. Sitting at the top of that list is Macquarie Atlas Roads ((MQA)), shorts lifting by 2.19ppt from 1.4% to 3.59% over the period. UBS noted 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.

Sims Metal Management ((SGM)) saw its short position rise by 2.01ppt from 4.59% to 6.6%. Analysts at CIMB noted last week they are starting to see signs of a sustained economic recovery in the US, which is the first step for an improvement in the scrap metal cycle. Getting this cycle right, which CIMB is confident Sims can do, will eventually translate into major share price upside. Conversely, Macquarie noted a few days later that it's been a rough year for the company, having announced several downgrades, booked some significant impairments, announced a cost reduction program and the replacement of both the global and European CEOs. Add to that poor cash flow and a long path still to run before a decent earnings recovery and you’ve got exactly why Macquarie sits at Underperform. Overall sentiment for the stock is neutral.

SingTel leads off the downside, its short position dropping 5.84ppt from 6.56% to 0.72%. Next on the list is Gryphon Minerals, its short position down 3.31ppt from 6.44% to 3.13% over the course of the month.

Next comes Sundance Energy ((SEA)), its short position covered by 2.75ppt, bringing shorts from 2.75% to 0.37%. BA-Merrill Lynch noted last week that the company's acquisition of 7,812 acres in the volatile oil area of the Eagle Ford was a good move. The broker thinks the asset will now become core to Sundance's ramping up of production to 5,000 boepd over the next 15 months. The broker believes the asset has significant upside potential and was secured on attractive terms. Sentiment for the stock is positive on straight Buys.

Our last significant monthly move was posted by Harvey Norman ((HVN)), with its short position coming off 2.01ppt from 10.18% to 8.17% over the month. 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.

There were a number of changes to the Top 20 most shorted stocks on the Australian market list. Myer ((MYR)) moved from four to six, David Jones ((DJS)) from six to twelve, Metcash ((MTS)) from eight to five, CSR ((CSR)) from thirteen to nine and Western Areas ((WSA)) from nineteen to fourteen. Both The Reject Shop ((TRS)) and Gunns ((GNS)) found their way off the list to be replaced by Sims and Wotif.com.

 

Top 20 Largest Short Positions

Rank	Symbol	Short Position	Total Product	%Short
1	JBH	17842776	98947309	18.03
2	FXJ	397347801	2351955725	16.89
3	ILU	65267788	418700517	15.59
4	PDN	101320406	836969286	12.11
5	MTS	99544895	880704786	11.30
6	MYR	63464978	583384551	10.88
7	FLT	10634800	100289792	10.60
8	LYC	199754850	1960801292	10.19
9	CSR	48680945	506000315	9.62
10	KCN	14120132	151828173	9.30
11	HVN	88764744	1062316784	8.36
12	DJS	44379734	531788775	8.35
13	MND	7110891	90663543	7.84
14	WSA	14172523	196843803	7.20
15	COH	3958189	57040932	6.94
16	BRU	18663150	273912685	6.81
17	BKN	11423327	169240662	6.75
18	ACR	11196966	166521711	6.72
19	WTF	13887743	211736244	6.56
20	SGM	13234071	204309387	6.48

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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