The Short Report

This story features TROY RESOURCES LIMITED, and other companies. For more info SHARE ANALYSIS: TRY

By Andrew Nelson

As shares pulled back from recent ASX 200 highs, short positions across the market have started to build again. In the week from the tenth to the seventeenth of April, six stocks saw their short positions increase by one percentage point (ppt) or more, while not one saw a decrease of that amount.

The iron ore sector lead the advance, while steel and chemical stocks also added significantly to their short positions. Short interest in the discretionary retail sector remains high, while what short covering took place was spread across sectors.

Troy Resources ((TRY)) was the most shorted stock over the week, up 1.44ppt from 1.29% to 2.63%. Following in a close second was Drillsearch ((DLS)), its shorts up 1.32ppt from 0.67% to 1.99%. Deutsche Bank trimmed its FY13 earnings forecasts a few weeks back because of a delay in the delivery of the Bauer-Lycium pipeline to next month. This is a short term issue, the broker confirming the company's leading shale position in the Cooper Basin offers a potential game-changer over the medium to longer term. Broker sentiment in the FNArena Database is perfect on straight Buys.

NRW Holdings ((NWH)) comes in a close third, with shorts up 1.31ppt from 4.25% to 5.56%. Macquarie reported last week the company had won a $6m contract at Roy Hill. The broker said an early win on a project such as this could signal more work down the track. The Outperform rating was maintained, although volatility in the share price is likely to continue until the iron ore market outlook stabilizes, probably over the next 12 months. Sentiment is positive on five Buys and one Sell.

Shorts in Whitehaven Coal ((WHC)) were 1.09ppt higher from 7.81% to 8.9%. Citi downgraded its recommendation on the stock to Hold from Buy last week after downgrading copper, aluminium, coal and gold price forecasts by anywhere from 5% to 15%. For WHC this added up to lower forecasts on the back of reduced coal price assumptions, seeing the price target trimmed on the lower earnings. CIMB downgraded to Hold at the end of last month, citing the ongoing run of operating issues, little in the way of clear information and the fact that first coal from Maules Creek has been pushed back to 2015. Sentiment for the stock is positive.

Monadelphous Group ((MND)) was up 1.08ppt from 9.93% to 11.01%. Brokers have been fairly quiet on the stock since the end of February when Deutsche Bank, UBS and BA-Merrill Lynch all downgraded their calls to Sell and Macquarie cut to Hold post the 1H result. The market outlook and scarcity of revenue growth were the biggest issues cited. Yet while just about everyone was downgrading, CIMB lifted to Buy seeing further growth ahead from cost cutting, despite management's assessment that FY14 will be a year of consolidation. Sentiment for the stock is negative, with CIMB the only broker at Buy.

Our last weekly significant mover was SAI Global ((SAI)), with shorts advancing 1.06ppt from 4.61% to 5.67%. JP Morgan, for one, is cautious on the stock, noting the regular occurrence of downgrades to guidance in the recent past. Sentiment for the stock is positive.

Shorts in Whitehaven Coal were up 3.2ppt from 5.7% to 8.9% over the month to the seventeenth of April. Troy Resources was 2.46ppt higher from 0.17% to 2.63% and Atlas Iron ((AGO)) was up 2.7ppt from 1.7% to 4.4%. Atlas was upgraded three times earlier this month, with JP Morgan moving to Buy and both Deutsche Bank and Macquarie lifting to Neutral. UBS lifted to Buy back at the end of February as well. After all of the upgrades, sentiment is understandably positive. The company reported quarterly results last week and while the reception was mixed, there were no ensuing changes to recommendation.

Shorts in Ansell ((ANN)) were 2.14ppt higher from 5.28% to 7.42%. Sentiment for the stock is negative, with BA-Merrill Lynch saying last month it doesn’t expect the company to reach its FY targets. Paladin Energy’s ((PDN)) short position is 2.13ppt higher from 12.02% to 14.15%. Last week’s quarterly production numbers were fairly well received and sentiment for the stock remains positive.

The last significant monthly increase was posted by NRW Holdings, with shorts up 2.02ppt from 3.54% to 5.56%.

Shorts in Bradken ((BKN)) have come off 2.32pptm from 6.86% to 4.54% over the course of the month. BA-Merrill Lynch didn't like last week’s update, calling it vague and downgrading FY13-15 forecasts by 10%-15%. Why? Because the one thing the broker could see in the release is that we are still not at the bottom. With earnings pressure to remain and earnings risk continuing, the broker expects the stock will continue to underperform the market. JP Morgan, at Buy, suggested production volumes were solid and demand is holding up, while the company is also bringing lower cost manufacturing online. Sentiment is positive for the stock.

Our last mention is GWA Group ((GWA)), which saw its short position come off 2.15ppt from 5.46% to 3.31% over the month in question. Sentiment for the stock is negative, with two brokers at Sell, two at Hold and just one advocating a Buy.

Changes to the Top 20 most shorted stocks list were minimal over the period, with just a few position changes and one alteration to the list’s composition. Cochlear ((COH)) departs the list from the number 15 spot, replaced by GUD Holdings ((GUD)) at the number 20 position.

Top 20 Largest Short Positions

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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