Tag Archives: Consumer Discretionary

article 3 months old

The Short Report

By Chris Shaw

There were some significant changes in short positions for the week from June 12. A total of three stocks saw increases of more than one percentage point, while the same number of companies enjoyed decreases of a similar magnitude.

The largest increase in shorts was for Fairfax ((FXJ)), where positions jumped to 14.29% from 10.97% previously. The change in positions came before a trading update from the company, which indicated additional cost savings would be sought as part of a restructuring as management continues to deal with difficult trading conditions on top of having to deal with ambitious shareholder Gina Rinehart whose media buying spree continues to divide general opinion throughout Australia.

The increase in shorts in Fairfax has pushed the stock to the second largest short position, behind only JB Hi-Fi ((JBH)). Consumer discretionary stocks such as retailers continue to dominate the large short position table, with the likes of Myer ((MYR)), David Jones ((DJS)) and Harvey Norman ((HVN)) among the top 20.

Also in the top 20 is Billabong ((BBG)), where the shorts have been vindicated as the share price tanked following the announcement of a capital raising in combination with some restructuring initiatives. Others in the top 20 short positions include Gunns ((GNS)), Echo Entertainment ((EGP)), Mesoblast ((MSB)), CSR ((CSR)), Iluka ((ILU)) and Paladin ((PDN)).

Behind Fairfax, the next largest increase in short positions was for Northern Star Resources ((NST)), where total shorts rose during the week to 1.88% from 0.08% previously. The increase came despite the company announcing good deep drilling results that have extended the known limits of the Paulsens Gold Mine orebody.

Echo Entertainment saw the next largest increase in shorts as positions climbed to 7.49% from 6.36% the week prior. This came as the company announced plans to raise more than $450 million to repay debt while indicating earnings for the current half would be down relative to the previous corresponding period.

While the discretionary retail sector dominates the top 20 short positions, three plays in the sector saw significant falls in shorts in the week from June 12. The three – JB Hi-Fi, David Jones and Myer, all saw declines in total positions of more than two percentage points. Positions remain significant at more than 21%, more than 8% and more than 10% of all outstanding capital respectively.

Monthly changes in shorts for the period from May 18 have also delivered some significant moves, with shorts in Iluka rising to 9.75% from 6.42% as brokers have updated commodity price assumptions that in recent weeks have generated lower earnings estimates and price targets for the company.

The weekly change in Fairfax continued a trend of the past month of an increase in shorts in the company. The number rose to 14.29% from 11.09% in the month. Another media play experiencing a similar trend was Seven West Media ((SWM)), where shorts increased to 4.4% from 1.98%. The change in positions comes as forecasts for Seven West have been trimmed in recent weeks as brokers factor in lower earnings given ongoing deterioration in the TV advertising market.

Among the largest falls in short positions for the month from May 18 was Bradken ((BKN)), where total shorts declined to 1.36% from 4.49% the month before. RBS Australia also picked up on this, attributing the decline in shorts to significant short covering in the stock.

In RBS's view Bradken offers strong earnings growth potential over the next three years given it is one of the better placed mining service companies in the market, especially thanks to an exposure that offers more predictable production volumes and cost and revenue benefits from offshoring plans.

Another stock where shorts fell during the past month was Mirabela Nickel ((MBN)). Positions declined to 2.46% from 4.51% the month prior, this as the company completed a capital raising that addressed the market's balance sheet concerns.

 

Top 20 Largest Short Positions

Rank Symbol Short Position Total Product %Short
1 JBH 21367258 98850643 21.62
2 FXJ 336725347 2351955725 14.29
3 CRZ 28553286 233689223 12.21
4 FLT 12101459 100039833 12.08
5 COH 6296488 56929432 11.02
6 MYR 59821089 583384551 10.24
7 LYC 175433094 1714846913 10.22
8 BBG 25300490 257888239 9.79
9 ILU 40924332 418700517 9.75
10 HVN 96109837 1062316784 9.04
11 PDN 75681421 835645290 9.04
12 GNS 74495950 848401559 8.77
13 DJS 44150046 528655600 8.36
14 ISO 434568 5703165 7.62
15 EGP 51549744 688019737 7.49
16 CSR 37433829 506000315 7.40
17 WTF 15464628 211736244 7.30
18 LNC 36268295 504487631 7.19
19 MSB 18172893 284478361 6.39
20 TRS 1668103 26071170 6.39

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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article 3 months old

Rudi’s Response: Qantas Is Not Investment Grade

By Rudi Filapek-Vandyck, Editor FNArena

I received and responded to the question below and thought it apt to share this with other subscribers and readers at FNArena.

Question from Philip P, Victoria:

"Hi Rudi, I would like your opinion on the following stocks. Qantas and Billabong which i unfortunately own. Do they have a future or are they just speculative bets from this point? Some brokers seem to think Qantas has a lot of value there . It just seems too hard to me and BBG appears as if it may just crash and burn. Although they will have a much smaller debt load. It beggars belief that they got into so much debt in this environment.

"On a more optimistic note i listened to BRR yesterday and they spoke about 2 stocks that caught my attention -TTS and NHF. They appear to fit your "all weather performer" category [you have mentioned TTS before] and consistent dividend payers at a reasonable price. Your opinion please.

"In the last 2 years i have bought NAB, ANZ, WBC, WOW in which I timed reasonably well . I also recently bought some more AGK in their capital raising. I also have some Senex energy which have done very well and will take up my entitlement in the upcoming capital raising.

"Those Europeans are sure keeping us entertained as well as of course our prime minister in Mexico.

"I hope to attend one of your gatherings in Melbourne sometime. Regards. Philip"

RESPONSE:

Hi Philip,

To understand the brokers' views on individual stocks, one has to understand they do not care much about durability, sustainability or quality for the long run.

Their main focus is on "cheap/expensive" over a potential 12 months horizon.

It really challenges my intellect to know there are actually funds managers in this country that hold very large equity stakes in a company such as Qantas ((QAN)) and have held such exposure for many years.

One can only hope they are the receiver of someone else's superannuation money.

I am a firm believer that airlines are by definition not investment grade. You fly them, but never buy them is one of my favourite idioms about the industry.

Another one I like to use is: date them, but never get married. That's just another way of saying: trade them as much as you like, but never ever think of including them in your investment portfolio - no matter how low the entry price.

The same principle applies, in my view, to traditional media companies and bricks and mortar retailers. The risk-reward balance on a longer term horizon is so much skewed towards extreme levels of high risk that I wouldn't go near with a barge pole.

To put it very bluntly: yes, Billabong ((BBG)) shares can experience a short squeeze at any point in time but the company is highly unlikely to exist in its current form in five years' time. In fact, its corporate existence may not make it that far at all (regardless of the balance sheet repairing that is going on).

Regarding your questions about Tatt's ((TTS)) and NIB ((NHF)); they are both obvious dividend propositions. But whereas the second one (NIB) is likely to prove a reasonable performer in the years ahead, I'd like you to research TTS in Stock Analysis.

What do you see when you look two years ahead? Today's very attractive looking high dividend yield is expected to drop significantly in FY14. What makes you think this won't have an impact on the share price too?

Again, I know a lot of stockbrokers like to put their clients into gaming stocks for their supposed defensive characteristics and yield, but I don't like the industry dynamics plus most of these dividends are to fall significantly in years ahead.

I hereby accuse many stockbrokers and advisors for having a too narrow and short-timed view when they promote these stocks. Note also these gaming stocks all have a very mixed legacy in terms of investment returns in the long run for loyal shareholders.

I note that AGL Energy ((AGK)) is on many a strategist's list of favourites and as such I can only assume that owning these shares will bring you joy and benefits in the years ahead.

I know many experts also like Senex. As long as you are comfortable with the higher risk profile that comes with a micro-energy play, I see no problem.

In general, I think you did reasonably well with that portfolio of yours. At least you're not down 30-40% or something along these lines. Do bear in mind that you are currently very much concentrated in the financial corner of the market and that is a risk in itself.

I also think I still need to write more clarifications about what exactly defines an "All-Weather Performer" as only Woolworths ((WOW)) and AGL Energy ((AGK)) could possibly deserve that label.

All other stocks you mention are dividend plays. There's a difference between the two, even though I personally like to combine All-Weather Performers with solid dividends.

I hope this helps.

Cheers

Rudi Filapek-Vandyck Your Editor

P.S. Subscriber Philip clarified in response that the stocks mentioned do not represent his complete portfolio, but only part of it.

Readers should note that my personal views are just that. None of the above is investment advice. Investors should always consult with a licenced financial advisor before making any investment decisions.

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article 3 months old

Top Ten Weekly Recommendation, Target Price, Earnings Forecast Changes

By Chris Shaw

In a more active week for ratings changes by the eight brokers in the FNArena database, a total of 11 recommendations went up compared to just six downgrades. Total Buy ratings now stand at 49.64%.

Among the upgrades were Aquila Resources ((AQA)), Macquarie lifting its rating to Buy from Hold following the lifting of coverage restrictions on the stock. In the broker's view the share rice is simply not pricing in the value of Aquila's asset base.

Deutsche Bank upgraded Commonwealth Property Office ((CPA)) to Hold from Sell on valuation grounds, as when the recent acquisition of 10 Eagle Street Brisbane is factored in, the stock is now trading in line with peers.

The announcement of an equity raising by Echo Entertainment ((EGP)) saw brokers across the market adjust their models, including changes to earnings per share estimates and price targets. Credit Suisse expects the stock will trade closer to the offer price post the issue, which is enough for the broker to upgrade to a Hold rating from Sell previously.

UBS has moved to a Buy rating on Fletcher Building ((FBU)) from Neutral previously, this as management has reconfirmed full year earnings guidance. At the same time the company announced some changes in senior management, which may see some restructuring and reorganising more likely in coming months, predicts UBS.

RBS Australia was active in upgrading resource stocks during the week, lifting Grange Resources ((GRR)), Iluka ((ILU)) and Mount Gibson ((MGX)) to Buy ratings from Hold previously. In all three cases the upgrades stem from changes to commodity price forecasts, which flows through to adjustments in earnings estimates and price targets as well.

The changes to commodity forecasts worked the other way as well, as RBS downgraded both Kingsgate Consolidated ((KCN)) and Perseus Mining ((PRU)) to Hold from Buy on the back of its revised targets and earnings forecasts.

For Incitec Pivot ((IPL)) the upgrade to Neutral from Underweight by JP Morgan is a valuation call and follows recent share price weakness. Minor changes to earnings estimates result in JP Morgan trimming its price target.

The rejection of an appeal against the approval of a temporary operating licence for Lynas ((LYC)) brings commissioning of the LAMP project closer in the view of UBS. This is enough for the broker to upgrade to Buy from Hold, with UBS also increasing its price target for the stock.

Relative share price underperformance is behind Citi's upgrade for National Australia Bank ((NAB)), as the broker notes NAB share price performance has lagged by around 6% so far this year. This leaves the stock offering compelling valuation according to Citi, who also lifts its price target.

With Transfield ((TSE)) shares having fallen since an earnings downgrade in April, RBS sees value enough to upgrade to Hold from Sell. A move to a more positive rating would require evidence of greater margin consistency and delivery on guidance for Easternwell.

On the downgrade side, Credit Suisse has cut its rating for Billabong ((BBG)) to Sell from Hold on the back of the capital raising and cutting of earnings guidance announced this week. The lack of earnings certainty translates into excessive risk in the broker's view, while value is also limited given the group's issues. Like others in the market, Credit Suisse has adjusted earnings forecasts and price target at the same time.

An update by Charter Hall Group ((CHC)) included the announcement of a contingent liability and this, plus recent share price outperformance, was enough for JP Morgan to downgrade to Hold from Buy. Price target has lifted slightly, while others in the market also adjusted earnings forecasts and price targets.

Lower earnings guidance from Jetset Travelworld ((JET)) caused brokers to cut forecasts and targets, while Deutsche Bank has also downgraded its rating to Hold from Buy. The rating change reflects uncertainty from restructuring initiatives announced with the market update.

The other resource upgrade was OZ Minerals ((OZL)), where JP Morgan cut its rating to Sell from Hold post a change in analyst covering the stock. While OZ Minerals offers a defensive exposure to the copper sector, says JP Morgan, the broker's view is this is priced in at current levels.

In terms of changes to price targets, the most significant were the cuts to Jetset Travelworld and OZ Minerals. There were no increases in forecasts greater than 2.5%. Earnings forecasts saw more significant adjustments, with Sydney Airport ((SYD)) enjoying some substantial changes and Goodman Group ((GMG)) and Whitehaven Coal ((WHC)) seeing some less significant increases. Cuts to Jetset's forecasts were the most significant at just over 10%. 


 

Total Recommendations
 Recommendation Changes

 

Broker Recommendation Breakup

 

Broker Rating

Order Company Old Rating New Rating Broker
Upgrade
1 AQUILA RESOURCES LIMITED Neutral Buy Macquarie
2 COMMONWEALTH PROPERTY OFFICE FUND Sell Neutral Deutsche Bank
3 ECHO ENTERTAINMENT GROUP LIMITED Sell Neutral Credit Suisse
4 FLETCHER BUILDING LIMITED Neutral Buy UBS
5 GRANGE RESOURCES LIMITED Neutral Buy RBS Australia
6 ILUKA RESOURCES LIMITED Neutral Buy RBS Australia
7 INCITEC PIVOT LIMITED Sell Neutral JP Morgan
8 LYNAS CORPORATION LIMITED Neutral Buy UBS
9 Mount Gibson Iron Limited Neutral Buy RBS Australia
10 NATIONAL AUSTRALIA BANK LIMITED Neutral Buy Citi
11 TRANSFIELD SERVICES LIMITED Sell Neutral RBS Australia
Downgrade
12 BILLABONG INTERNATIONAL LIMITED Neutral Sell Credit Suisse
13 CHARTER HALL GROUP Buy Neutral JP Morgan
14 JETSET TRAVELWORLD LIMITED Buy Neutral Deutsche Bank
15 KINGSGATE CONSOLIDATED LIMITED Neutral Neutral RBS Australia
16 OZ MINERALS LIMITED Neutral Sell JP Morgan
17 PERSEUS MINING LIMITED Neutral Neutral RBS Australia
 

Recommendation

Positive Change Covered by > 2 Brokers

Order Symbol Previous Rating New Rating Change Recs
1 LYC 80.0% 100.0% 20.0% 5
2 GRR 83.0% 100.0% 17.0% 6
3 CPA - 57.0% - 43.0% 14.0% 7
4 SUL 43.0% 57.0% 14.0% 7
5 QBE 50.0% 63.0% 13.0% 8
6 MGX 25.0% 38.0% 13.0% 8
7 ILU 50.0% 63.0% 13.0% 8
8 FBU 50.0% 63.0% 13.0% 8
9 IPL 50.0% 63.0% 13.0% 8
10 PPC 67.0% 80.0% 13.0% 5

Negative Change Covered by > 2 Brokers

Order Symbol Previous Rating New Rating Change Recs
1 JET 50.0% 25.0% - 25.0% 4
2 CAB 40.0% 20.0% - 20.0% 5
3 CHC 100.0% 80.0% - 20.0% 5
4 GWA 33.0% 17.0% - 16.0% 6
5 OZL 50.0% 38.0% - 12.0% 8
6 PRU 60.0% 50.0% - 10.0% 6
 

Target Price

Positive Change Covered by > 2 Brokers

Order Symbol Previous Target New Target Change Recs
1 PPC 1.310 1.342 2.44% 5
2 GRR 0.838 0.845 0.84% 6
3 CPA 1.029 1.030 0.10% 7
4 QBE 14.636 14.639 0.02% 8

Negative Change Covered by > 2 Brokers

Order Symbol Previous Target New Target Change Recs
1 JET 0.768 0.615 - 19.92% 4
2 OZL 11.540 10.844 - 6.03% 8
3 CAB 6.532 6.264 - 4.10% 5
4 LYC 1.710 1.640 - 4.09% 5
5 PRU 3.280 3.158 - 3.72% 6
6 ILU 19.001 18.454 - 2.88% 8
7 GWA 2.188 2.153 - 1.60% 6
8 MGX 1.429 1.414 - 1.05% 8
9 CHC 2.512 2.496 - 0.64% 5
10 IPL 3.519 3.506 - 0.37% 8
 

Earning Forecast

Positive Change Covered by > 2 Brokers

Order Symbol Previous EF New EF Change Recs
1 SYD 5.200 8.050 54.81% 6
2 GMG 23.088 24.638 6.71% 8
3 WHC 10.371 10.971 5.79% 7
4 SMX 43.420 44.200 1.80% 5
5 AIX 16.767 16.983 1.29% 6
6 LLC 78.400 78.938 0.69% 8
7 COH 281.950 283.763 0.64% 8
8 IAG 25.538 25.663 0.49% 8
9 SUN 64.435 64.675 0.37% 8
10 SHL 80.563 80.750 0.23% 8

Negative Change Covered by > 2 Brokers

Order Symbol Previous EF New EF Change Recs
1 JET 6.600 5.900 - 10.61% 4
2 ILU 203.863 193.863 - 4.91% 8
3 OZL 71.388 68.213 - 4.45% 8
4 GWA 15.200 14.700 - 3.29% 6
5 SVW 79.280 77.680 - 2.02% 4
6 RIO 701.368 689.417 - 1.70% 8
7 MQG 275.929 271.414 - 1.64% 7
8 NHF 13.133 12.950 - 1.39% 4
9 TCL 13.857 13.686 - 1.23% 7
10 PNA 35.348 34.954 - 1.11% 8
 

Technical limitations

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article 3 months old

Wipe Out: Billabong No Longer Investment Grade?

 - Billabong announces dilutive capital raising
 - Proceeds to reduce debt
 - Earnings guidance also cut
 - Brokers expect the stock will remain under pressure

By Chris Shaw

The ongoing balance sheet pressures being experienced by Billabong ((BBG)) thanks to continued weak trading conditions in a number of markets have forced the hand of management, with the company yesterday announcing a highly dilutive capital raising.

The issue will be a six for seven pro-rata entitlement offer at $1.02 per share to raise around $225 million, with the proceeds to be used to repay group debt. Group debt should fall to around $100 million post the issue, which is fully underwritten.

The issue appears to be the result of a further deterioration in trading conditions in the view of BA Merrill Lynch and has been somewhat rushed in the view of JP Morgan. This reflects the lack of any accompanying detail with respect to a transformation program for Billabong in coming years. A basic outline has been offered that includes reducing the complexity of the business, increasing brand focus and centralising systems, but much work needs to be done in Citi's view.

At the same time as the issue was announced management has lowered earnings guidance for Billabong and for FY12 this means previous EBITDA (earnings before interest, tax, depreciation and amortisation) guidance of a result of around $157 million has been cut to a result of $130-$135 million. 

In FY13 the expectation is earnings will be in excess of pro-forma results for FY12, assuming no further deterioration in trading conditions. JP Morgan expects the current softness in trading will continue into FY13.

The revised earnings guidance from Billabong was well below market forecasts and brokers have been quick to respond by cutting estimates for the company. The changes also reflect the impact of the capital raising.

In Citi's view the clearing of the decks by the new management team at Billabong will result in cuts to consensus earnings estimates of 50% or more in FY13, while RBS Australia estimates the capital raising will dilute FY13 earnings by around 46%.

While taking the view the dilutive capital raising was not the best way for balance sheet concerns to be addressed, RBS suggests the future for Billabong will at least be boosted by a much stronger balance sheet. This should provide management with the flexibility to make the necessary changes to the business.

In RBS's view Billabong is no longer a top-line growth business, meaning the focus should shift to operational efficiencies. Valuation should be related to well capitalised, vertically integrated brand owners and RBS notes similar global peers are trading on an average one year forward earnings multiple of around 16.7 times at present.

Based on the new earnings estimates of RBS, which in earnings per share (EPS) terms are 16.3c this year and 13.9c in FY13, the stock would be trading on an undemanding FY13 multiple of around 10.5 times. As a basis for comparison, RBS's new EPS forecasts compare to the normalised EPS forecasts of JP Morgan of 15.3c and 10.7c respectively.

While not appearing expensive, Citi suggests Billabong shares are likely to remain under pressure near-term given the sales and profit outlook remains cloudy. This puts some pressure on management to show early signs of fixing the brands and stores in the broker's view and sees a Neutral rating retained.

JP Morgan also expects Billabong shares will struggle, given continued exposure to poor macro conditions, execution risk with respect to the transformation strategy to be put in place and ongoing questions about future sales and margins.

Given this, JP Morgan retains an Underweight rating on the stock with a price target of $1.20, down from $1.89. BA-ML has cut its target to $0.85 from $1.50, while retaining an Underperform rating.

Credit Suisse has seriously taken the knife to its forecasts, dropping its target price to a mere 41c from $2.50 with an accompanying downgrade to Underperform. "In our view," says Credit Suisse, "Billabong is a high risk investment and probably not suitable fro mainstream investors". The analysts cite the company's poor record in predicting earnings, a long term decline in brand earnings, and a long period of restructuring with likely further changes ahead as reasons for its negative view.

Noting FY12 earnings guidance has fallen $25m since the last update in February, CS suggests were BBG to lose a further $30m in earnings across the forecast horizon (FY12-14) -- a quite feasible possibility in the broker's view given recent unpredictability -- all equity would be eliminated in the broker's valuation.

RBS is far more positive longer-term, seeing potential for new management to deliver operational improvement over time. This implies value at current levels sufficient to justify a Buy rating. RBS's target declines to $1.85 from $2.45.

Overall the FNArena database shows Billabong is rated as Buy twice, Hold three times and Sell three times, with UBS (Buy) yet to update its forecast. The consensus target in the database is $1.68, but aforementioned "unpredictability" is reflected in a range of targets from Credit Suisse's 41c to Citi's $2.80.

One for the brave.

Shares in Billabong are currently suspended, having last traded at $1.83. This compares to a trading range over the past year of $1.70 to $6.42.

 
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article 3 months old

Breville Quietly Conquering America

 - Moelis reiterates Buy rating on Breville
 - Broker comfortable with forecasts post meeting with management
 - International operations remain the driver of earnings
 - Implies further upside from current levels
 

By Chris Shaw

Having already rated Breville Group ((BRG)) as a Buy, the positive view of Moelis has been reinforced following a meeting with management of the electrical appliances group.

Feedback from the meeting indicated the Domestic Electricals business, which accounts for around 30% of group earnings, has performed satisfactorily in 2H12 despite a still subdued economic environment.

At the same time, despite no major new product releases in the second half of FY12 the International division, which represents about 70% of group earnings, has performed in line with the expectations of management.

The international operations continue to represent the main growth driver for Breville, as Moelis notes the Breville brand in the US still has a less than 10% market share in the US$2 billion niche top end market segment.

Moelis sees as achievable the objective of sustainable 10-15% per year constant currency revenue growth over the next 10 years or so in the US operations. This reflects strong consumer acceptance of higher margin new products and ongoing scale improvements from an increased distribution footprint.

For FY12, Moelis is forecasting EBITDA (earnings before interest, tax, depreciation and amortisation) of around $68 million, which is slightly ahead of guidance of a result between $65-$67 million. In earnings per share (EPS) terms this translates to a forecast of 32.2c, rising to 36.3c in FY13. This compares to consensus EPS forecasts according to the FNArena database of 32.5c and 35.2c respectively.

On the forecasts of Moelis, Breville Group is trading on a FY13 earnings multiple of around 12 times. This is regarded as undemanding given the growth potential on offer in the US and the fact the company has $45-$50 million in net cash that can be used to boost growth or lift returns to shareholders.

This makes the stock a preferred 'Buy and Hold' in the small industrials space for Moelis, even allowing for some near-term consolidation following strong share price performance this year. The other attraction of Breville is a solid yield, as Moelis expects dividends of 20c this year and 22.5c in FY13. This translates to a fully franked yield of 4.6% this year, rising to 5.1% next year.

Despite a market capitalisation of less than $600 million Breville receives some coverage by brokers in the FNArena database. Macquarie and Credit Suisse both rate Breville as a Buy and UBS rates the stock as Neutral. 

The Buy argument is the same in that the international operations offer strong longer-term growth potential and so justify a positive view according to Macquarie, while UBS's Neutral view is a valuation call as the broker downgraded from a Buy last month on the back of share price gains made so far this year.

The consensus price target for Breville according to the database is $4.37, with a range from Credit Suisse at $3.80 to Macquarie at $4.80. Moelis has a price target on the stock of $5.00.

Shares in Breville today are unchanged at $4.38 in early trading in a slightly stronger overall market. Over the past year the stock has traded in a range of $2.51 to $4.66, the current share price being in line with the consensus target in the FNArena database.
 

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article 3 months old

Oz Spending And Savings Both Increasing?

By Andrew Nelson

The latest read on the Commonwealth Bank’s ((CBA)) Business Sales Indicator shows that business sales are up for the 10th straight month. Conversely, Dun & Bradstreet’s latest Consumer Credit Expectations Survey tells us people are too afraid to spend right now, preferring to save. The question is: can these two seemingly contradictory reads be reconciled?

We’ll start with CommBank’s Business Sales Indicator (BSI) which shows a 1.9% increase business sales across Australia in May, in seasonally adjusted terms. This turns out to be the third increase in sales in the past four months, with spending now up 5.9% on last year. The bank notes this is the largest annual gain in more than two years.

Commonwealth Bank’s Matt Comyn notes that while the results for the year are encouraging, Australian consumer sentiment remains unsteady. However – and here’s where things start making sense – in trend terms the BSI increased by only 0.3%, which is the measure’s slowest growth rate since September 2011.

Still, Comyn is heartened by the small steps that are being taken, noting that even small increases in confidence can translate to improved levels of spending. He points out that the May figures were helped by the RBA’s larger than expected rate cut, which he claims has positively effected on the amount of money being spent with Australian businesses.

CommSec Chief Economist and author of the BSI, Craig James, notes the fragility of the ongoing recovery is demonstrated by the May figures. While he admits a 1.9% lift in seasonally adjusted terms spend looks like solid growth, it has yet to flow though to trend estimates, confirming that the BSI is posting the slowest trend growth rate in nine months.

“Consumer confidence is still fragile, due mainly to international factors and general uncertainty about a number of domestic economic issues. So while spending is continuing to rise, there is still uncertainty about whether momentum will be maintained,” said James.

This is exactly the type of commentary that supports the latest findings from Dun & Bradstreet’s latest consumer credit survey, which shows 60% of Australians are worried about their current financial position, while more than 30% say they wouldn’t be able cover basic expenses for more than few week if they suddenly lost their job.

D&B report national household savings levels are at a 20-year high. Yet despite this, a third of low-income earners and a quarter older Australians would only be able to survive for up to a month if left without steady income. In fact, the survey shows that 69% of Australians earning less than $50,000 a year and 62% of consumers aged 50-64 remained concerned about their personal finances.

Dun & Bradstreet Director, Adam Siddique, notes that the more vulnerable demographics are under significant financial pressure, with the latest research clearly showing consumers are worried about money.

While he lays some of this at the door of the still lingering pessimism post the global financial crisis, he also notes that a large number of households are still simply living hand-to-mouth. This, he explains, is why national household savings levels are at a 20-year high, yet many are still worried about saving.

“Ten to 15 years ago consumers were more comfortable living with a lower savings to debt ratio. However, continued global economic uncertainty is weighing on Australian households and dissuading discretionary spending, credit usage and significant investments such as buying a property,” said Mr Siddique.

D&B’s data show that 53% of all consumers are less likely to spend money on entertainment and other non-essentials than they were 12 months ago. Similarly, 40% of consumers are less likely to use existing credit to buy non-essential items.

These figures fit well with the findings from CommBank, who notes the weakest performing sectors in May were clothing stores (down 0.7%), vehicle rentals and professional memberships (both down 0.2%). The findings are similar on annual terms, with the weakest sectors being motels and hotels (down 6.7%), followed by vehicle rentals (down 0.6%).

There is some good news, however. The were some decent trend increase in sales in May, with wholesale, distributors and manufacturers up 2.7%, amusement and entertainment up 1.8%, mail/telephone order providers up 1.5%. Contracted services and service providers also showed well, with both up around 1%.

In annual terms, D&B note that only four of the 20 industry sectors contracted in May, which a similar outcome to both March and April. The best performers were amusement and entertainment, up 21.2%. Notable mentions go to mail/telephone order providers, which were up 16.7%, retail stores were up 12.2%, and contracted services lifted 8.2%. Surprisingly, general retailers maintained traction, with store sales up 7.5% on a trend basis.

 
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article 3 months old

The Short Report

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By Chris Shaw

Changes in short positions for the week from June 5 showed a clear division, as while no stock saw increases of more than one percentage point there were a number of companies for which total shorts declined by more than two percentage points.

The largest decline was in Nexus ((NXS)), where shorts fell to 0.15% from 9.59% previously. The fall in positions came following news commercial arrangements for the Crux Field have been expanded to include some earlier development concepts.

The next largest decline in shorts was in Tishman Speyer ((TSO)), where positions declined to 0.01% from 5.92% previously. This reflects the upcoming de-listing of the group following the distribution of US asset sale proceeds to shareholders and a winding up of the company.

Shorts in Sundance Resources ((SDL)) fell to 0.6% from 2.6% the week prior as the company completed a placement of $40 million in new shares to further develop the Mbalam project, while shorts in Elders ((ELD)) fell to 3.31% from 5.45% following news Ruralco Holdings ((RHL)) acquired a 10.1% strategic stake in the company. Ruralco has indicated it has no current intention to make a takeover offer for Elders.

With no major increases in short positions the largest short interests among ASX-listed stocks continue to be dominated by companies with exposure to the consumer discretionary sector. This includes the likes of JB Hi-Fi ((JBH)) Billabong ((BBG)), Myer ((MYR)), David Jones ((DJS)) and Harvey Norman ((HVN)).

Others in the top 20 include Lynas Corporation ((LYC)), Iluka ((ILU)) and Paladin ((PDN)) among the resource sector and industrials such as gaming group Echo Entertainment ((EGP)), building materials play CSR ((CSR)) and biotech Mesoblast ((MSB)).

With respect to monthly changes in positions for the period from May 11, the largest increases were in Linc Energy ((LNC)) and Myer ((MYR)) at just over two percentage points each. Linc has seen little in the way of news since replying to an ASX price query that targets for FY12 were expected to be met, while a recent investor day from Myer left brokers with the view sales growth remains an issue for the company.

Among the largest falls in short positions for the month were Spark Infrastructure ((SKI)), where AGM commentary included news of some management changes and some strategic changes designed to simplify the group's structure.

Bradken ((BKN)) enjoyed a fall in shorts to 1.73% from 4.94% as the market completed the adjustment to earlier news of some issues in the group's rail division, while shorts in Echo fell to 6.36% from 8.93% as the market adjusted expectations to reflect a trading update in the period.

Shorts in Mirabela Nickel ((MBN)) fell for the month to 3.11% from 5.13%, this as the market factored in a $120 million capital raising that should help put to rest investor fears with respect to the state of the group's balance sheet.

As noted by RBS Australia, shorts in Coca-Cola Amatil ((CCL)) have risen over the past month by more than 0.5 percentage points to more than 1.6%. In the broker's view this reflects the fact the stock is fully valued at current levels, even allowing for what is regarded as a strong medium-term growth profile.

 

Top 20 Largest Short Positions

Rank Symbol Short Position Total Product %Short
1 JBH 23973358 98850643 24.26
2 MYR 72378948 583384551 12.39
3 CRZ 28135705 233689223 12.03
4 FLT 11716554 100039833 11.71
5 COH 6508795 56929432 11.40
6 FXJ 257845008 2351955725 10.97
7 DJS 57428510 528655600 10.83
8 LYC 182432879 1714846913 10.61
9 HVN 102459626 1062316784 9.62
10 BBG 24772467 257888239 9.60
11 ILU 38033593 418700517 9.07
12 PDN 75531506 835645290 9.03
13 GNS 74495950 848401559 8.77
14 CSR 38615647 506000315 7.63
15 WTF 15548636 211736244 7.34
16 ISO 413769 5703165 7.26
17 LNC 35079085 504487631 6.94
18 EGP 43684076 688019737 6.36
19 MSB 17992548 284478361 6.32
20 TRS 1570006 26071170 6.01

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.

Technical limitations

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Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

article 3 months old

Top Ten Weekly Recommendation, Target Price, Earnings Forecast Changes

By Chris Shaw

In a quiet week for changes to stock ratings the eight brokers in the FNArena database upgraded just three recommendations while downgrading five. Total Buy ratings now stand at 49.31%.

Credit Suisse was responsible for two of the upgrades, lifting its ratings on both OrotonGroup ((ORL)) and QBE Insurance to Buy from Neutral. For Oroton the upgrade is a valuation call and comes on the back of recent weakness in the company's share price. This weakness is giving investors the change to acquire a quality retailer at a more attractive price in the broker's view.

For QBE Insurance the value on offer is also improving, this as premium rate rises are starting to flow through and balance sheet pressures for the group are easing. Benign weather is also helping the investment case for QBE at present according to Credit Suisse.

Seven West Media ((SWM)) was the other upgrade for the week, with Citi moving to a Buy rating from Hold previously. A tough operating environment means things could get worse before they get better and sees Citi adjust earnings estimates and its price target.

While there is scope in Citi's view for Seven West to make a rights issue to address balance sheet concerns, the broker argues the share price is already factoring this in and value is thus seen as attractive at current levels.

On the downgrades side Macquarie has cut its rating on Cabcharge Australia ((CAB)) to Sell from Neutral, reflecting the potential for earnings to be impacted if credit card surcharge levels are capped, as might be the intention from authorities in Australia. Price target has been cut to reflect the potential earnings impact, while the uncertainty leads Macquarie to suggest the shares are more likely to underperform.

Deutsche Bank has downgraded Cochlear ((COH)) to Sell from Hold on market share concerns stemming from the N5 recall and the impact this has had on the company's reputation in the market. Earnings will slip in FY13 in Deutsche's view and the stockbroker has cut its forecasts and price target to reflect this expectation.

While the announcement of a capital raising by Echo Entertainment ((EGP)) has caused Credit Suisse to adjust earnings forecasts and price target, it is recent share price appreciation that sees the broker downgrade to a Sell rating from Neutral. The gains of late make the stock too expensive in the broker's view (even though the cause is take-over speculation).

Credit Suisse has also downgraded Specialty Fashion ((SFH)) to Sell from Neutral given the expectation that ongoing retail headwinds will impact on earnings for some time. Price target has been reduced to reflect lower earnings estimates.

Fletcher Building ((FBU)) has some franchise strength in New Zealand that probably deserves a premium multiple in the view of UBS, but a review of the broker's model sees earnings forecasts cut through FY13.

The changes mean a reduction in price target and given few signs yet of any cyclical upturn, UBS has downgraded to a Neutral rating from Buy previously.

Elsewhere, adjustments to broker models meant relatively modest changes in price targets across stocks under coverage, with no price targets increasing or decreasing by as much as 5.0% during the week. The largest increase was 3.7% for SP Ausnet ((SPN)), while the biggest cut in target was 4.1% for Cabcharge.

Changes to earnings estimates were also relatively modest, ranging from an increase of just over 1.0% for Caltex ((CTX)) to a cut of nearly 9% for Sydney Airport ((SYD)).

Total Recommendations
 Recommendation Changes

 

Broker Recommendation Breakup

 

Broker Rating

Order Company Old Rating New Rating Broker
Upgrade
1 OROTONGROUP LIMITED Neutral Buy Credit Suisse
2 QBE INSURANCE GROUP LIMITED Neutral Buy Credit Suisse
3 SEVEN WEST MEDIA LIMITED Neutral Buy Citi
Downgrade
4 CABCHARGE AUSTRALIA LIMITED Neutral Sell Macquarie
5 COCHLEAR LIMITED Neutral Sell Deutsche Bank
6 ECHO ENTERTAINMENT GROUP LIMITED Neutral Sell Credit Suisse
7 FLETCHER BUILDING LIMITED Buy Neutral UBS
8 SPECIALTY FASHION GROUP LIMITED Neutral Sell Credit Suisse
 

Recommendation

Positive Change Covered by > 2 Brokers

Order Symbol Previous Rating New Rating Change Recs
1 ORL 20.0% 40.0% 20.0% 5
2 SWM 50.0% 63.0% 13.0% 8
3 QBE 50.0% 63.0% 13.0% 8
4 CWN 75.0% 86.0% 11.0% 7
5 PRU 50.0% 60.0% 10.0% 5

Negative Change Covered by > 2 Brokers

Order Symbol Previous Rating New Rating Change Recs
1 CAB 40.0% 20.0% - 20.0% 5
2 GWA 33.0% 17.0% - 16.0% 6
3 SPN - 25.0% - 40.0% - 15.0% 5
4 FBU 63.0% 50.0% - 13.0% 8
5 AWC 38.0% 25.0% - 13.0% 8
6 COH - 25.0% - 38.0% - 13.0% 8
7 TEL - 13.0% - 25.0% - 12.0% 8
8 BXB 75.0% 71.0% - 4.0% 7
9 VBA 86.0% 83.0% - 3.0% 6
10 AIO 88.0% 86.0% - 2.0% 7
 

Target Price

Positive Change Covered by > 2 Brokers

Order Symbol Previous Target New Target Change Recs
1 SPN 1.030 1.068 3.69% 5
2 PRU 3.238 3.280 1.30% 5

Negative Change Covered by > 2 Brokers

Order Symbol Previous Target New Target Change Recs
1 CAB 6.532 6.264 - 4.10% 5
2 SWM 3.578 3.434 - 4.02% 8
3 GWA 2.188 2.187 - 0.05% 6
 

Earning Forecast

Positive Change Covered by > 2 Brokers

Order Symbol Previous EF New EF Change Recs
1 CTX 114.400 115.917 1.33% 6
2 QBE 135.884 137.129 0.92% 8
3 TEL 13.730 13.792 0.45% 8
4 CPA 7.571 7.586 0.20% 7
5 BHP 326.730 327.236 0.15% 8
6 NWS 133.729 133.936 0.15% 7
7 RIO 700.487 701.571 0.15% 8
8 FMG 46.907 46.979 0.15% 8
9 RMD 16.490 16.515 0.15% 8
10 OSH 13.930 13.949 0.14% 8

Negative Change Covered by > 2 Brokers

Order Symbol Previous EF New EF Change Recs
1 SYD 5.700 5.200 - 8.77% 6
2 VAH 2.743 2.600 - 5.21% 7
3 OST 12.586 12.157 - 3.41% 7
4 FXJ 8.613 8.400 - 2.47% 8
5 QUB 7.550 7.425 - 1.66% 4
6 NHF 13.133 12.950 - 1.39% 4
7 CPU 47.257 46.689 - 1.20% 8
8 COH 284.575 281.950 - 0.92% 8
9 BLD 17.725 17.600 - 0.71% 8
10 OZL 71.888 71.388 - 0.70% 8
 

Technical limitations

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article 3 months old

A Retailer Rebound?

By Andrew Nelson

In stark contradiction to recent macro reads on the Australian economy, which seem to be indicating the national economy is still on a stable footing, Australian retailers have continued to struggle since Canberra’s post-GFC cash handouts were spent.

The problem is consumer confidence never really recovered and workers are still worried about keeping their jobs, which has fed through to lower retail lending rates and an overall general reluctance to part with hard earned cash at the shops.

With Europe still in the throes of economic turmoil, the faltering US recovery still faltering and with sure signs of a slowdown in China, it’s no wonder investors and even the man on the street remain worried. This has resulted in a renewed rush to the US dollar and the safety of government bonds (excluding those from Greece, Spain, Italy and Portugal to name a few).

However, economists from management consulting house Deloitte Access Economics are seeing little rays of sunshine emerging for Australia’s retail sector and have outlined these views in the latest edition of their Retail Forecasts publication, dated May 2012.

One of the main harbingers of glad tidings is interest rate reductions, with Deloitte noting the rate cuts that started happening from late last year definitely helped to lift spending, at least in the in the early part of 2012. In fact, retail sales were up 1.8% in the March quarter in inflation-adjusted terms and overall retail sales growth is now at its strongest since the end of 2009, which is when the aforementioned post-GFC stimulus wound back down.

The RBA cut the official cash rate by a further 50 basis points at the start of May, with most in the market expecting several more rate cuts to over the remaining months of 2012. The central bank followed up with a more cautious 25 point cut this month. Deloitte predicts future cuts will help to free up a nice sized slice of extra disposable income.

Economists from Deloitte note the latest Federal Budget should also prove helpful to the retail outlook. A primary example is the extra payments for school age children and increased family welfare spend. However, this latest round of government largesse will likely only provide a boost to retailers over the shorter term.  

One of the main problems the economists see is that the global economic backdrop is far from encouraging present, which could see potential customers paying down existing debt and keeping a bit of a wedge in the wallet rather than running out to buy a new pair of Nikes. Deloitte expects consumer confidence will likely to remain in the danger zone given both the Australian share market and Aussie are slipping as money is redirected in to safer havens.

Still, the economists predict that the likely run of continued interest rate cuts coupled with the announced budget handouts will help the retail sector to book at least some level of upward momentum in the months ahead.

Supporting this assumption is the fact that wages growth is picking up and employment levels are slowly improving, which of course would help to push retail growth at what Deloitte expects will be a reasonable level over 2012 and into 2013. Retail sales growth in 2010-11 was just 0.7%, which was a two decade low. However, the consultant expects to see that rise to 2.0% growth in 2011-12, and then continue up to 3.0% growth in 2012-13.

On a state by state basis, Deloitte points out that Western Australia continues to outpace the pack, while resource rich Queensland and the Northern Territory are also doing better than the non-resource states. The consultant expects the gap between resource states and non-resource state will widen through 2012-13, especially since resource driven capital expenditure will be one of the main drivers of Australia’s growth over the next year. However, the consultant warns that risks continue to abound, especially in relation to the global economy.

Yet Deloitte’s outlook is far from weak, with the consultant’s longer term outlook for retail still penciling in solid gains, albeit still well short of historic trend rates for sales growth. Slower growth in individual wealth will cap the upside for the near to mid-term, while slowing population growth will also serve to limit retail upside going forward. That said, some of the latest migration figures are showing an increase, which will eventually help to provide a bit of a boost for retailers.

 
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article 3 months old

The Short Report

.ref1 {background-color:#B8E3F8;}

By Chris Shaw

Weekly changes in short positions for the week from May 28 were dominated by increases, with seven stocks seeing positions rise by more than one percentage point against just two declines of a similar magnitude.

The largest change in positions was in Mesoblast ((MSB)), where shorts jumped to 6.17% from 2.86% in the week prior to the company updating on its corporate strategy with respect to product development. Work continues on developing Mesenchymal Precursor Cells (MPCs) for treating diseases such as Parkinson's and Huntington's disease, but competition in the stem cell sector appears to be increasing.

Shorts in Paladin ((PDN)) rose to 9.03% from 7.43% for the week as the company updated on production and costs for the March quarter. Brokers expect cash flows will be the main point of focus for the market in coming months given upcoming refinancing commitments.

SingTel ((SGT)) experienced an increase in shorts to 4.28% from 2.71% as the market continues to see little in the way of positive drivers for earnings in coming months, especially given the operating environment for telcos in India continues to deteriorate.

For Myer ((MYR)) shorts jumped to 12.62% from 11.24% post an investor day update from the company that left brokers with the view driving sales growth would remain the retailer's biggest challenge in the shorter-term.

The increase has reinforced Myer's place among the top 20 short positions on the Australian market, a list which continues to be dominated by consumer discretionary stocks such as JB Hi-Fi ((JBH)), David Jones ((DLS)), Harvey Norman ((HVN)), Billabong ((BBG)) and Wotif.com ((WTF)). Paladin also makes the list along with Lynas ((LYC)) and Iluka ((ILU)) among resource plays and industrials such as CSR ((CSR)) and Echo Entertainment ((EGP)).

Despite indicating to the market targets for production and cash management for 2012 were still in line to be met, shorts in Linc Energy ((LNC)) increased for the week from May 28 to 6.73% from 5.41%. Shorts in Centro Retail ((CRF)) also increased to 2.28% from 1.15% the week before, this despite brokers turning more positive given some good news such as asset sale results and the settlement of a class action.

A recent trading update from Ten Network ((TEN)) indicated media market conditions remain difficult and this saw some minor cuts to earnings estimates for Seven West ((SWM)) as well. The market responded by lifting short positions in the stock to 3.3% from 2.26% previously.

Total shorts in Mirabela ((MBN)) declined for the week from May 28 to 3.1% from 4.46% as the market continues to adjust to the recent announcement of a capital raising. The raising should help reduce what had been some liquidity concerns surrounding the company.

The net largest decline in shorts was in Alesco ((ALS)), where positions fell to 2.11% from 3.16% previously. The change came prior to the pre-release of full year earnings, which the market generally viewed as solid given what remain difficult operating conditions, and a public offer by DuluxGroup ((DLX)). Alesco's board has rejected the offer.

Outside of those stocks in the top 20, increases in shorts for the month from May 4 were largest for Dart Energy ((DTE)) and Centro Retail, where in both cases shorts rose by just under 2.0 percentage points to 4.31% and 2.28% respectively. For Dart the changes came prior to the stock being removed from the S&P/ASX200 index.

Monthly falls in shorts were largest for Whitehaven Coal ((WHC)) and Spark Infrastructure ((SKI)), the former falling to 1.03% from 4.72% and the latter to 2.66% from 6.31%. The changes for Whitehaven came prior to news the longwall at the Narrabri underground mine has been installed, while for Spark the market continues to adjust views in relation to the proposed acquisition of the Sydney de-sal plant.

The other fall in shorts of more than 2.0 percentage points for the month was in Henderson Group ((HGG)), where positions declined to 0.75% from 2.8% previously. The major news for the company in the period was IOOF Holdings ((IFL)) lifting its stake in the company.

 

Top 20 Largest Short Positions

Rank Symbol Short Position Total Product %Short
1 JBH 23734597 98850643 24.01
2 MYR 73693279 583384551 12.62
3 CRZ 28322705 233689223 12.15
4 FLT 11833312 100039833 11.82
5 FXJ 273740259 2351955725 11.64
6 DJS 58662263 528655600 11.06
7 COH 6180079 56929432 10.83
8 LYC 176783079 1714846913 10.31
9 ISO 566387 5703165 9.93
10 ILU 41017629 418700517 9.79
11 BBG 24170908 257888239 9.38
12 HVN 99837835 1062316784 9.38
13 PDN 75419878 835645290 9.03
14 GNS 75429556 848401559 8.88
15 CSR 41480002 506000315 8.21
16 WTF 16287604 211736244 7.69
17 EGP 49018195 688019737 7.14
18 LNC 34079022 504487631 6.73
19 TEN 64630518 1045236720 6.19
20 MSB 17572480 284478361 6.17

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.

Technical limitations

If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.

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