The Short Report

Array
(
    [0] => Array
        (
            [0] => ((SPL))
            [1] => ((RFG))
            [2] => ((GUD))
            [3] => ((CDD))
            [4] => ((PRY))
            [5] => ((COH))
            [6] => ((ASL))
            [7] => ((AGO))
            [8] => ((FMG))
            [9] => ((ILU))
            [10] => ((MTS))
            [11] => ((GUD))
            [12] => ((MND))
        )

    [1] => Array
        (
            [0] => SPL
            [1] => RFG
            [2] => GUD
            [3] => CDD
            [4] => PRY
            [5] => COH
            [6] => ASL
            [7] => AGO
            [8] => FMG
            [9] => ILU
            [10] => MTS
            [11] => GUD
            [12] => MND
        )

)

This story features STARPHARMA HOLDINGS LIMITED, and other companies.
For more info SHARE ANALYSIS: SPL

Guide:

The Short Report draws upon data provided by the Australian Securities & Investment Commission (ASIC) to highlight significant weekly moves in short positions registered on stocks listed on the Australian Securities Exchange (ASX). Short positions in exchange-traded funds (ETF) and non-ordinary shares are not included. Short positions below 5% are not included in the table below but may be noted in the accompanying text if deemed significant.

Please take note of the Important Information provided at the end of this report. Percentage amounts in this report refer to percentage of ordinary shares on issue.

Stock codes highlighted in green have seen their short positions reduce in the week by an amount sufficient to move them into a lower percentage bracket. Stocks highlighted in red have seen their short positions increase in the week by an amount sufficient to move them into a higher percentage bracket. Moves in excess of one percentage point or more are discussed in the Movers & Shakers report below.

Summary:

Week ending July 31, 2014

The ASX200 reclaimed the 5500 mark last week in an upward trend that this week saw it break through 5600. As the first of the earnings reports begin to trickle in, shorting activity is not frantic but on a net basis shorts are increasing rather than decreasing. No stock fell out of our 5% plus table last week, but we welcomed in all of Starpharma Holdings ((SPL)), Retail Food Group ((RFG)), GUD Holdings ((GUD)) and Cardno ((CDD)), on small short increases.

iron ore continues to be a dominant theme on the short-side, with Atlas Iron now the third most shorted stock in the market, Fortescue creeping further up the table and Mineral Resources just shying of joining the 10% plus club with another solid short increase. Virtus Health is another upward creeper, with shorters no doubt eyeing Primary Health Care's ((PRY)) new move into VRT's prime IVF market. Paladin Energy has lost a few short fans, possibly since two Japanese reactors passed their safety inspections.
 

Weekly short positions as a percentage of market cap:

10%+

COH   17.8
AGO   15.1
ACR    14.8
JBH     12.9
MYR   12.6
MTS    12.6
MND   12.2
TRS     11.2
UGL    11.1
ILU     10.7
NWS   10.6
PDN    10.1

In: ILU

9.00-9.99%

NXT, MIN,

Out: ILU, BKN, ALQ

8.00-8.99%

CAB, ALQ, BKN, DSH

In: BKN, ALQ, DSH             Out: FMG, WHC

7.00-7.99%

WHC, MTU, RRL, FMG, BLY, ASL

In: FMG, WHC          Out: DSH

6.00-6.99%

KAR, SGT, WSA, NUF, BRU, MSB, VET, VRT

No changes

5.00-5.99%

FLT, SGM, INV, TEN, GWA, GNC, IFL, TSE, HVN, SPL

In: GNC, IFL  Out: RGF, GUD, CDD, SCP
 

Movers and Shakers

While this report covers shorting activity from the prior week, special mention has to be made this week of two text book cases of how the short-side is played. Longstanding most-shorted stock Cochlear ((COH)) entered this week 17.8% shorted and posted an earnings result that was better than expected. While analysts remained completely unconvinced of any rebound in fortune, COH’s stock price shot up 10%.

That is a clear example of a short-covering scramble or “short squeeze”, in which the shorters run for the hills.

On the other hand, mining services provider Ausdrill ((ASL)) announced a very large goodwill write-down this week and its shares immediately plunged 18% before finishing the day down 9%. While there may have been a couple of bargain hunters opening longs on the day at the lows, the fact ASL was more than 7% shorted also suggests short-covering, this time of the profit-taking kind.

We will be keen to see where these two stocks’ short percentages finish up in next week’s report.

But back to last week’s action. Having moved from fourth most shorted to third most shorted a fortnight ago, new shorters’ darling Atlas Iron ((AGO))  took the silver last week with an increase to 15.1% shorted from 14.4%. This increase is in contrast to the Cochlear experience of this week, given Atlas shares rallied during the week on a record production report but clearly not due to short-covering. The shorts simply saw it as an opportunity to go shorter.

It is also notable that Fortescue Metals ((FMG)) had been following behind Atlas as they both crept up the short list over recent weeks, highlighting an iron ore pure-play theme rather than a company-specific theme, but last week FMG shorts actually fell 0.7ppt to 7.4% from 8.1%.

There was more top-of-the-table action last week. Mineral sands miner Iluka Resources ((ILU)) saw its shorts rise by 1.2ppt to 10.7% from 9.5%, thus admitting Iluka into the elite 10% plus club, while incumbent consumer staple Metcash ((MTS)) saw its shorts rise 1.1ppt to 12.6% from 11.5%. Iluka had reported an in-line production report the prior week and its shares went nowhere last week, while Metcash shares received a boost from a strong June retail sales number.

On the short reduction side of the ledger, GUD Holdings ((GUD)) reported a pretty gud FY14 earnings result last week, or at least not as big a loss as expected, and its shares enjoyed a rally. GUD subsequently dropped out of our 5% plus table with a 1.6ppt covering of shorts to 3.5% from 5.1%.

Plus 10% club member Monadelphous ((MND)) saw its shares drop last week, possibly helped along by a downgrade to Sell and a big target price reduction from Deutsche Bank, following a review of the resource sector engineering & construction outlook. MND shorts reduced by 1.0ppt to 12.2% from 13.2% which may suggest some short profits taken.

Short watchers may like to note that six out of seven FNArena database brokers covering Mona now have Sell or equivalent ratings, with one lone Hold, and at 12.2% Mona is the seventh most shorted stock on the ASX. Were the company to post a better than expected earnings result on August 19, look out.

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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