The Short Report

This story features JB HI-FI LIMITED, and other companies. For more info SHARE ANALYSIS: JBH

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 September 26, 2015.

Last week saw the ASX200 attempt bounce up and down yet again, springing off 5000 to as far as 5150 and back to 5000 again.

It’s official. Last week I highlighted two energy stocks which had been steadily creeping up our table in past weeks and last week both Santos and AWE joined the elite 10% plus club, which is actually becoming less elite and more crowded by the week. JB Hi-Fi ((JBH)) also snuck back in.

On the other side of the resource sector coin, service companies Monadelphous, MMA Offshore, Cardno and WorleyParsons – all previous members of the 10% club — all saw short reductions last week which took Cardno and Worley down into the 9% bracket. Perhaps shorters are deciding the resource services decline has just about run its course.

On the other side we see Nine Entertainment climbing up into the 8% bracket and Vocus, which has subsequently announced a merger with M2 Group ((MTU)), rising into the 6% bracket.

And speaking of mergers, Programmed Maintenance ((PRG)) shorts continue to fly up and down as the Skilled Group ((SKE)) tie-up progresses.

Weekly short positions as a percentage of market cap:

10%+

MTS    22.5
MYR   18.6
CAB    16.6
SGH    16.3
ORI     14.5
FLT     13.8
MND   13.5
MIN    13.3
DSH    12.8
PRY    11.7
GEM   11.4
JBH     11.2
MRM  10.6
STO     10.6
SUL    10.5
AWE   10.5
UGL    10.2
WOR   10.3
CDD   10.0

In: JBH, STO, AWE               Out: WOR, CDD

9.0-9.9%

CDD, SEK, WOR, AWC, GXL
 
In: CDD, WOR, AWC           Out: JBH, STO, AWE, FMG                        

8.0-8.9%

FMG, NEC, MGX, WOW

In: NEC          Out: AWC, GWA, PRG, ALQ, MSB

7.0-7.9%

ALQ, ARI, KAR, MSB, KCN, GWA, IVC, PDN

In: ALQ, MSB, GWA, IVC               Out: NEC, NWH, BKN

6.0-6.9%

NWH, SGN, VOC, WSA, WHC, SPO, BKN, NWS, RFG, NVT, JHC, SGM, PRG, NXT, TFC

In: PRG, NWH, BKN, VOC, WSA, NWS, NXT     Out: IVC, SXY, RRL, IGO

5.0-5.9%

AAD, IMF, SWM, CAR, SXY, IFL, FXL, CVO, RRL, DLS, CQR, AAC, TEN, ILU, VRT

In: SXY, RRL, IFL, VRT      Out: WSA, NXT, VOC, NST

Movers and Shakers

Monadelphous ((MND)) and MMA Offshore both service the resource sector and both are longstanding members of the 10% plus shorted club. But last week both enjoyed a slip down the table, with Mona shorts falling 1.4 percentage points to 13.5% from 14.9% and MMA shorts falling 1.3ppt to 10.6% from 11.9%.

Given service companies Cardno ((CDD)) and WorleyParsons ((WOR)) also saw short reductions, which took them both out of the 10% club, we might assume the shorters are beginning to feel there’s not much left to run in what for them would have been a highly successful theme of shorting resource services, as commodity prices have tumbled and mining/gas companies have pulled back on their capex.

But for the gas companies themselves, it’s a different story, given oil prices have again fallen and China fears have heightened. After creeping steadily up our 5% plus shorted table for a few weeks, Santos ((STO)) last week added 1.0ppt to 10.6% from 9.6% and AWE ((AWE)) added 0.7ppt to 10.5% from 9.8%. Both are newcomers to the 10% plus club.

For Santos, which is about to enjoy a cash flow boost from the start-up of GLNG, the major issue is one of debt, which sets it aside from its gas major peers. AWE’s share price has plunged since its significant FY15 result miss, which likely has the shorters salivating. But brokers are coming to believe AWE has fallen too far, and two recent upgrades means the stock enjoys five from seven Buy ratings in the FNArena database.

A Santos short-play is likely one of expecting a capital raising, but the company does have asset divestment options to pursue.

In a similar vein to number two most shorted stock Myer, Nine Entertainment ((NEC)) is an “old world” company. It’s not bad enough that the current advertising outlook is bleak, free-to-air TV seems destined to become an historical curiosity on the rise of Netflix and other such internet-based media services.

Despite Nine having a strong balance sheet and solid yield, and the prospects of corporate action a relaxation of media ownership laws by the new government would imply, Nine shorts rose 1.2ppt last week to 8.6% from 7.4% as the stock becomes the latest bracket creeper of note.

Fibre cable company Vocus ((VOC)) has been hanging around the low end of our 5% plus shorted table for a while now and interest was heightened during the company’s takeover of peer Amcom. Vocus shorts rose 1.0ppt to 6.6% from 5.6% last week, ahead of the subsequent announcement of a planned merger with M2 Group.  

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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