Short Stories

Asian Rail

It looks as if the increasing rise in fuel prices could be having repercussions wider than just airlines, who we blogged on yesterday. China Railway Group Ltd (0390), whose subsidiaries include irrigation works, ports, docks and airports, has seen its share price fall from 9HKD in January to 7.3HKD today. Thus, the percentage of the company's Market Cap out on Loan to short investors (%MCOL) has increased from 0% in December, to 8.7% today; a sizable amount for a an Asian stock (please click to enlarge graph). Even more surprisingly, Utilisation is at 54%, so there is still plenty left to borrow, with 9 Days to Cover for those investors who wish to buy back shares. The average Utilisation for the rest of the Asia Capital Goods sector is 13%, and for the rest of the Hong Kong Small Caps it is 18%. This stock is by far the most borrowed company in its sector, with Noble Group Ltd (N21) having a %MCOL of 4% in second place.

In the Hong Kong Small Caps, Guangshen Railway (0525) is the most borrowed company, with 10% MCOL (big fry for Asia). It appears that railways are fairly easy to borrow, as this stock's Utilisation is also low at 37%. There are 19.74 Days to Cover for those who think the price will rebound - it has already fallen from 6.9HKD to in October 2007 to 4.2HKD today and has risen slightly since May 12th. 24.5% of the Market Cap is still Lendable as opposed to China Railway's 4.11%.

Joint Corp

Joint Corp (8874), the Japan-based real estate property trader, has become the target of short investors this side of 2008. In January, the percentage of the company's Market Cap out on Loan (%MCOL) to short investors was 2%, it then increased to 8% last week, and is now at 7%, with a slight upturn in the past day. As you can see from this graph, although short sellers came to the trade relatively late, they would have made considerable profits since the start of the year when they started to increase their positions. This percentage is high for an Asian stock, and although the Utilisation is quite big at 63%, it is unusual for an Asian stock to have 37% left to borrow with a %MCOL above 5%. For instance, Cfs Corp (8229), another Japanese Small Cap Stock, has a %MCOL of 1.7%, but it is 90% Utilised. The average Utilisation for the rest of the Japan Small Caps is 13%, for the rest of the Japan Real Estate Sector of which Joint Corp is a member, it is 7%.

Short interest mounts up in the Alps

Actually, it's not the French Alps we are talking about here. Our alerts tell us that Japan listed Alps Electric (6770) has seen a recent rise in the short interest as of late. The Nikkei 225 listed stock has a % Market Cap on Loan (%MCOL) of 7.5%, big-fry in Asian terms. Utilisation is at 38%, and the average Utilisation for the rest of this market is just 10%, to put it into context. The rest of the Japan Technology Hardware & Equipment Sector is 11%.

Bloomberg reported on April 4th that the audio equipment company fell to the lowest in six years. The share price has dropped from 1,450JPY in late December 2007 to 950JPY today. Investors could believe that the price will fall even more, but for those who wish to buy back shares in Alps Electric there are 6.6 Days to Cover.

Other heavily shorted stocks in the Nikkei 225 include Ebara Corp (6361) at 11.81 %MCOL, Pioneer Corp (6773) at 9.28%, Oki Electric Industry Co Ltd (6703) at 8.48%, and Mizuho Financial Group Inc (MFG) at 8.07%. Alps Electric is the next one down and Toto (5332), one of our best-timed shorts of 2007, is next at 7.29%.

Ebara

Ebara (6361), the most shorted stock in the Nikkei 225, has a percentage Market Cap on Loan (%MCOL) of 12.77%, up from 9% one year ago. The manufacturing company's share price has decreased from 700JPY in April last year to 300JPY today. Utilisation is 74%, which means that there is now little left to borrow. The average Utilisation for the rest of the Nikkei 225 is 10%, and the rest of the Japan Capital Goods too. For those investors wishing to buy back shares, there are 13.59 Days to Cover.

The second most shorted stock is Toto (5332), one of our best-timed shorts for 2007, which has a %MCOL of 7.99%, and a Utilisation of 86.59%.

Babcock & Brown

"Babcock & Brown's (BNB) Infrastructure has fuelled market fears that it is struggling to manage its heavy debt load after saying it will sell some of an asset it bought less than three months ago," says Scott Rochfort in The Sydney Morning Herald. Mr Rochfort also went on to say that BNB's share price had more than halved since May. The investment company is down 8% today.

According to our data, BNB, which has a percentage Market Cap on Loan (%MCOL) of 13.2%, is the second most shorted stock in the ASX 50 today, after Macquarie, whose %MCOL 18.77%. Rio Tinto is third with a %MCOL of 12.12% and then Westfarmers at 9.87%. The increase in BNB's %MCOL became significant in mid-January, when the %MCOL rose from 8% on January 13th to 14% on February 14th.

BNB's Utilisation is 78%, so it is fast becoming hard to borrow, and there were 4.3m shares traded yesterday compared with company's one year average of 3m. The highest spike in volume traded was on January 25th at 9.5m shares. For those investors wishing to buy back shares there are 9.83 Days to Cover. The average Utilisation for the ASX50 is 22%, and for the rest of the Australia Diversified Financials it is 22% as well.

BNB's Lendable Quantity has decreased from 44m shares on February 12th, to 39m today. The Quantity on Loan has increased, from 34.5m shares on February 26th, to 37m shares today.

Mixed feelings towards Asia-Pacific stocks

The FT reported this morning that markets in the Asia-Pacific region had: "edged back amid continued worries about the outlook for the US economy." The article went on to document certain companies within these regions (please click on the link to read the story). Our data shows us the short interest side of the story for some of these stocks.

Komatsu (6301), the JP listed industrial company, has seen a rise in short interest as of late (please click to enlarge graph). The percentage of Komatsu's Market Cap on Loan (%MCOL) has increased from 1.2% to 1.6% since late November last year. This is of course not a huge percentage, but in Asian terms, any increase in the short interest of a stock is notable. Komatsu's Utilisation is 9% today so there is still plenty left to borrow.

Japan Steel Works (5631), who lost 2.8% yesterday, has a %MCOL of 5.8%, up from 1% since October 30th (please see graph). The company's Utilisation is 50%, which means there is only half of the float left to borrow. Like most Asian stocks, once the %MCOL exceeds 5-6%, the Utilisation increases dramatically and it fast becomes difficult to borrow shares.

Mizuho Financial (8411), also fell 3.1%, juxtaposed with a %MCOL increase of 0.4% in late January to 3.1% today. The company's Utilisation is 23%, up from 1% in late January.

Fast Retailing (9983) gained 3%, and as you can see from this graph of the stock's %MCOL, the short interest has decreased too - down from 2.5% in late December to 1.5% today. Fast Retailing's Utilisation has also decreased from 50% in mid-October to 23% today.

Cathay Pacific (0293), Hong Kong's biggest airline rose 0.7%. Although there has generally been an increase in short positions in this stock over the past - from 1% to 2.5%, in the last week shorts have been covered as the share price has started to rise. Utilisation is 45.5%.

CNOOC (0883), China's biggest offshore oil explorer, was down 2.1%. There has been a slight increase in the company's %MCOL, from 0.41% to 0.49% since February 23rd, and the share price has continued to decrease. Utilisation is 5.5%.

Sinopec (0338) fell 3.6%, and although short positions have been covered this week, in the last fortnight the %MCOL has risen from 2% to 2.6% as the share price has fallen. The Utilisation is 31.5%.

In Sydney, Santos (STO), Australia's third largest oil and gas group, fell 2.7%. The %MCOL in Santos has risen from 2% to 6% in the last six weeks, although it does look as though shorts have been covered in the last few days. Utilisation is at 25%.

Woodside Petroleum (WPL) slipped 0.1%. Since early December the %MCOL for this stock rose from 2% to 4% in mid-February, but the %MCOL has now decreased to 3.5%, although there has been a slight increase in the past two days.

Australian MidCaps

On Tuesday we blogged on A.B.C Learning Centre (ABS). As you can see from this graph, short positions have been closed out and the percentage of the company's Market Cap on Loan (%MCOL) has dropped from 11.5% on Tuesday to 8% today. Utilisation has also decreased, from 54% on Monday to 39% today. For those wishing to buy back shares there are 9.38 Days to Cover. A.B.C's share price has rebounded slightly from 3.8AUD on February 21st to 3.95AUD today.

Another Australian MidCap, Bendigo Bank (BEN) has seen a decrease in its %MCOL, down from 17% on February 20th to 14.3% today. The company's Utilisation was also high at 72% on February 20th, dropping down to 65% yesterday. There are 18.36 Days to Cover. The bank's share price has rebounded from 11AUD on February 15th to 11.4AUD today.

However, Bendigo is still the most shorted stock in the ASX MidCap, with the average Utilisation for the market standing at 30%. Other ASX MidCaps with a high %MCOL are Paladin Energy (PDN) at 13.45%, and James Hardie (JHX), one of our best-timed shorts of 2007, at 13.4%.

Bendigo is also the most shorted in the Australian Bank's Sector, whose average Utilisation is 16%. The second most shorted bank is St George Bank (SGB) - with a considerably lower %MCOL at 4.18%, then Bank of Queensland (BOQ) at 4.08%.

Short interest in China Everbright

According to our data, short investors have increased their positions in China Everbright (0165). The percentage of the holding company's Market Cap on Loan (%MCOL) has risen from 2% on February 26th 2007 to 6.5% today (please click to enlarge graph).

Utilisation is high at 72%, and the %MCOL is not particularly big, which means there was never that much stock available to borrow originally (this is typical of many Asian stocks). For those wishing to buy back shares there are 9.32 Days to Cover.

The Utilisation for the rest of the HK Equity (Others) is 20%, and for the rest of the Asia Diversified Financials it is 18%.

China Everbright's share price rose in February 2007 from 7HKD, to 35HKD in late November 2007, and from there it has fallen back down to 17HKD today. Since early February this year there has been a general decrease in the %MCOL, which means that short positions have been closed out and profits have been made.

Shorting: Is it all A.B.C?

Reuters reported this morning that the ASX MidCap stock A.B.C Learning Centres (ABS) had fallen 70%, amid talk that its founder "had been forced to sell shares."

"A third of the stock changed hands," continued Reuters, "with A$759 million ($702 million) wiped off its value, after traders said rumours swept the market of selling by hedge funds, while the company issued two statements denying it was in breach of loan covenants."

According to our data, short investors were borrowing a significant amount of A.B.C a year ago, when the Utilisation percentage was 80%. Since then it has remained high and stands today at 54.91%. In the summer of last year there were 70m shares traded compared to the company's two year average of 5m.

As you can see from this graph (please click to enlarge), the percentage of A.B.C's Market Cap on Loan (%MCOL) started to rise on November 14th - from 8% then to 11.5% today. In early January the %MCOL reached 13%. The share price has dropped from 7AUD on October 17th to 3.94AUD today.  Although A.B.C remains heavily utilised, the %MCOL remains relatively low, which could indicate it has been difficult to borrow this stock. For those wishing to buy back shares now, there are 13.71 Days to Cover, also known in the U.S as "short interest ratio."

The Utilisation percentage for the rest of the ASX MidCap is 30%, and for the rest of the Australia Consumer Services Sector it is 28%.

Data Explorers Short Portfolio: Up 30% in 8 Months

Data Explorers has been monitoring the performance of a portfolio of short stocks selected by our screening tools since 7th June 2007.  The performance of this paper portfolio shows that the average return (calculated on an equally weighted basis opening price to opening price between the date when the story was published and 28th January 2008) was 29.7% per stock compared with a (short) return of 10% in the FTSE All World during the same period.

Total based on alerts since 7th June 2007	30%
Total based on news since 29th October 2007	9%
Overall Total since 7th June 2007	19%
FTSE ALL WORLD since 7th June 2007	10%

Of the thirty-eight stocks in the portfolio, only four have subsequently risen in price since the publication date, namely Yamana Gold, Hagemeyer, Calmaine and Fast Retailing.  Outstanding successes on the short side were: American Home Mortgage (delisted), Erinaceous Group (down 95% since publication), Northern Rock (down 78% since we highlighted it in a report on EMEA banks), Ambac (down 69%), Black's Leisure (down 65%), Martha Stewart (down 59%) and IKB (down 55%).  Download short_portfolio.xls

While some people may find it macabre to examine stocks which have lost so much value, we believe it is important to highlight the fact that stock borrowers (hedge funds and prop traders)came early to many of the themes which have dominated the last eight months, namely subprime, property and retail.  We would also highlight the fact that the cost of borrowing many of the stocks in our portfolio is not taken into account, and nor is the bid-offer spread. Please refer to our disclaimer concerning investment advice.

After 29th October, we began to focus more on stocks which feature in the daily news.  These stocks produced a return of 9% on average between 29th October and 28th January, while the FTSE World index produced a return of 14% in the same period.

If you would like further information about the methodology used to screen for potential short stocks, please contact Alex Hofmann (+44) 207 392 4010 or Email: ah@dataexplorers.com