The Short Report

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

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 March 2, 2017

Last week saw the ASX200 largely move into stall mode around the 5750 mark as the last couple of days of the results season played out. While the stall is reflective of a similar lull in the Trump rally on Wall Street, most notable in last week’s trade was exiting of positions in the resource sector. For many, no doubt very profitable positions.

To that end, it is interesting to note that amongst a sea of red below, Independence Group ((IGO)), Alumina Ltd (AWC)), Rio Tinto ((RIO)), Iluka Resources ((ILU)), Mineral Deposits ((MDL)) and Dacian Gold ((DCN)) all featured. Within the 10% shorted club, both Orocobre ((ORE)) and Syrah Resources ((SYR)) added substantially to shorts.

Mineral Deposits and Dacian Gold are new arrivals at the bottom of the 5% plus table. Alumina Ltd jumped into the 8% bracket from the 6% bracket.

Elsewhere we see shorters moving in for the kill on Domino’s Pizza ((DMP)) – a steady mover up the table since its wages troubles began – and the unfortunate Ardent Leisure ((AAD)).

Weekly short positions as a percentage of market cap:

10%+

ACX   16.7
MYR   15.6
WSA   14.1
ORE    14.1
TFC     13.7
SYR    11.9
VOC   11.7
NEC    11.2
MTS    10.3

Out: WOR                 

9.0-9.9%

WOR, MYX, DMP
 
In: WOR, DMP                                             

8.0-8.9%

IGO, AWC, BEN, OFX, NWS, AAD, SRX, BAL, MND, DOW

In: IGO, AWC, BEN, AAD, SRX, DOW                 Out: DMP                              

7.0-7.9%

FLT, GTY, NXT, PRU, ISD, ILU, BGA, MTR, RWC, RIO

In: ILU, RIO              Out: DOW, IGO, BEN, SRX, HSO

6.0-6.9%

A2M, SGH, EHE, IPD, SEK, CSV, HSO, PDN, IVC, SHV, IFL

In: HSO, EHE, SHV, IFL                  Out: AWC, RIO, ILU, MYO, ISD

5.0-5.9%

CTD, MSB, MYO, BKL, MDL, KAR, GXL, JHC, AAC, CSR, DCN, WOW, OSH, SPO, CAB, CQR

In: MYO, MDL, JHC, DCN, SPO, CAB, CQR                   

Out: AAD, IFL, EHE, IPH, TGR, SUL, GMA

Movers and Shakers

Lithium and graphite are both commodities associated with the rapid development and growth of batteries and miners thereof have proven popular with investors in recent times, seeing share prices soar on the hype. But the road to production of any commodity is invariably fraught with risks and subject to setbacks, often proving a reality check for eager shareholders.

Orocobre posted an earnings report last week in line with expectations but the market was taken aback by a big cut in lithium production guidance due to problems with evaporation pools, delaying the timing to nameplate capacity and sending analysts scurrying to downgrade their earnings forecasts.

Orocobre has tracked a steady path up into the 10% plus shorted club over recent weeks and last week saw another big jump to 14.1% from 11.0%.

There has been no new news out of Syrah Resources of late since the graphite hopeful’s December quarter update, which showed the cost of developing the Balama project is steadily creeping up. We might conclude shorters in this space are lumping battery-related commodities together, given last week saw Syrah shorts rise to 11.9% from 10.6%.

Also experiencing development delays is Independence Group’s much vaunted Nova nickel project. Nickel price forecasting is a difficult game at present given production and exports are under the spell of the fickle whim of various governments. Last week Independence shorts rose to 8.7% from 7.6%.

If nickel is a difficult one at present, ask two mining analysts their thoughts on alumina prices and you’ll get two completely different answers. Again government interference is an issue, with the Chinese government perhaps about to curtail alumina/aluminium production capacity, or perhaps not. The FNArena database shows two Buy ratings on Alumina Ltd and five Sells.

Last week Alumina shorts jumped to 8.3% from 6.0%.

While the tragedy at Dreamworld brought into question the impact on Ardent Leisure’s future theme park earnings, no one was prepared for a consensus-missing result within Ardent’s earnings report from the flagship Main Event business. Main Event has been the earnings driver that has offset difficulties among other businesses, and particularly the Dreamworld issue.

Ardent shorts rose to 8.1% from 5.9% last week.

While Domino’s Pizza shorts only increased 0.9ppt last week, thus not rendering the company a true Mover & Shaker, it is worth noting that the once can-do-no-wrong superstar has crept steadily up the table over recent weeks and is now sitting at 9.6% shorted. Domino’s is yet to resolve its wage underpayment issues, and thus earnings guidance is uncertain.
 

ASX20 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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