The Short Report

This story features METCASH LIMITED, and other companies. For more info SHARE ANALYSIS: MTS

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 February 18, 2016

Last week saw the ASX200 fall to a new low under 4800 before rallying back towards 5000 once more. It was also a week in which the local reporting season stepped up a gear.

As was the case last week, the constituents of the 10% plus shorted club have not changed but there has been some movement within the table.

Metcash ((MTS)) shorts are back over 20% having dropped to 19% the week before. Mineral Resources shorts jumped sharply up to over 16% ahead of the company’s result release. Vocus ((VOC)) is also yet to report but has climbed further up the table to 16.2%. Western Areas is also yet to report but saw its shorts fall by over a percentage point.

The conundrum is Primary Healthcare. When the company reported a better than expected result last week, its shares jumped 20%. We would have expected Primary shorts to be elevated ahead of the release and then fall thereafter to reflect short-covering within that rally. But Primary shorts fell to 10.8% before the release and jumped back to 13.1% after.

GUD Holdings reported back in January and again disappointed, and the shorters have now pushed that stock into the 7% bracket from the 5% bracket. Ditto Beach Petroleum ((BPT)), although despite oil price exposure, this is more likely related to the Drillsearch ((DLS)) merger.  

Thereafter, some interesting names have appeared on the table for the first time in the 5% bracket. They include Ansell ((ANN)) and Cover-More ((CVO)), both of which had delivered pre-release profit warnings, and Perpetual ((PPT)), which reported today and has enjoyed a sharp rally. Bendigo & Adelaide Bank ((BEN)) has snuck back in to join peer Bank of Queensland ((BOQ)).

Weekly short positions as a percentage of market cap:

10%+

MTS    20.5
MYR   19.9
MND   17.4
MIN    16.6
VOC   16.2
FLT     13.9
ORI     13.7
WSA   13.7
WOR   13.4
PRY    13.1
GXL    12.5
AWC   12.2
CAB    11.9
JBH     10.2    
SEK    10.1

No changes    

9.0-9.9%

WOW, RFG, GEM
 
In: RFG           Out: AWE

8.0-8.9%

SUL, TFC, AWE, ALQ, SGH

In: AWE                     Out: RFG, ARI

7.0-7.9%

FMG, ARI, GUD, BPT, KAR, WHC, MRM, CAR

In: ARI, GUD, BPT               Out: IVC, SGM

6.0-6.9%

IVC, DSH, PDN, NWS, SGM, SYR, AAC

In: IVC, SGM, NWS, AAC              

5.0-5.9%

IFL, PPT, CTD, BEN, SVW, CDD, BOQ, MGX, CVO, ANN, GMA, SCP, ILU, IMF, GWA, AAC, BKN, AHY, SWM, SHV

In: PPT, BEN, CVO, ANN                Out: BPT, GUD, AAC, BKN, AHY, SWM

Movers and Shakers

In last week’s Report I made this observation:

“The same was likely true for Primary Health Care ((PRY)) and for the 1.5ppt worth of shorts who got out, probably a blessing. Following the company’s result yesterday the share price jumped 20%. Primary shorts remained last week at 10.8% so it will be interesting to see the level of covering apparent in this Report next week, which undoubtedly was the major driver of that rally.”

But Primary shorts are back up to 13.1%. The 20% rally must have involved short covering, so either shorts were quickly re-established or there is an issue with the timing of the ASIC short data. Primary reported on the 17^th. The table above represents ASIC data of the 18^th. That data relies on the good will of traders to report their short positions promptly.

Maybe they haven’t. Suffice to say, we always have to be a little wary of ASIC’s numbers.

Because there may be a similar problem with regard Mineral Resources ((MIN)), which reported on the 18^th. The share price shot up on a strong result but this week’s ASIC data are showing an increase in shorts to 16.6% from 14.9%.

Late last month, nickel producer Western Areas ((WSA)) provided a quarterly report that highlighted significant reduction in costs in the face of the falling nickel price. Brokers agreed that while the company was not about to shoot any goals until nickel prices recover, it was not about to go under either, or shut up shop al la Mincor ((MCR)) or Panoramic ((PAN)).

Despite the nickel price falling yet further (to 2003 levels), Western Areas share price has rallied somewhat and in this case, short-covering appears to have been involved. WSA shorts have fallen to 13.7% from 15.2%.

GUD Holdings’ ((GUD)) share price was crunched at the end of January when the company published yet another disappointing result. It’s an ongoing story of the company’s strong Auto division being dragged down by perennially weak brands Dexion and Sunbeam. The share price has bungled along ever since but last week GUD shorts rose to 7.4% from 5.4%.
 

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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