Reports and Shorts – Profits from Squeezes

A feature of the Australian reporting season so far is the dramatic share price reactions of stocks where there are significant “short” positions. The implications for investors and traders are obvious. Whether looking for short term gains, or a good entry price for the long term, buying heavily shorted shares before they report is worth considering.

Two stocks among the fifteen most shorted reported this week. JB HiFi and both came in slightly above expectations. I believe the explosive share price rises that followed are at least partly due to the “short squeeze”. JB HiFi reported Earnings Per Share (EPS) of $1.06, just 2% above expectations. The chart from the Tracker platform illustrates the market reaction:

JB HiFi – Daily reported EPS of $0.31, about 9.7% above consensus. The share price has not looked back: Daily

As always, investors and traders must be aware of the risks. Even heavily shorted stocks can fall significantly after an earnings “miss”.  Cochlear reported EPS of $2.26, about 20% below estimates:

Cochlear – Daily

The 5% + fall in its shares reflects that miss, despite a large short position. It’s interesting to note that in a fairly flat share market since, it has recaptured almost half of that fall. I suspect that this is another implication of a large short position – most who want to sell the stock have already done so. No consolation to traders, but potentially very important to investors.

This could also mean that the risk around heavily shorted stocks is asymmetric – there is more potential on the upside than the down.

The Australian Securities and Investment Commission (ASIC) publishes the reported short position in stocks daily, with about a one week lag. The position is expressed as a percentage of the total shares on issue. This table shows the position of some of the top 15 shorts at August 10, with the 1 and 2 day share price return of those already reported, and dates for those yet to report:

Recent rises in the Australian share market may indicate a cautious return of confidence. Investors considering buying any of the stocks on this list, and have reasonable confidence that the company will report in line with or above current estimates, could look at buying before the result is announced. Those looking to limit risk can consider option strategies, such as buying put options against share holdings.

Similarly, traders may look at buying call options to gain exposures with limited downsides. Those taking outright positions are likely to also employ aggressive risk management techniques, including stop loss orders.


About michaelmccarthycmc

Chief Market Strategist - CMC Markets and Stockbroking Regular on ABC, BBC, Bloomberg, Channel TEN, CNBC, SBS and SKY
This entry was posted in Market, Shares, Stocks, Trading and tagged , , , , , , , , , , , , , , , , . Bookmark the permalink.

2 Responses to Reports and Shorts – Profits from Squeezes

  1. Andy P says:

    Not wanting to point out the obvious, but stops wont help with an adverse gap which should always be considered. Shame options commisions are so high in Australia – even with raised vol going into an announcement they’re great for hedging loss in either direction if you’re long/short the underlying.

    • michaelmccarthycmc says:

      Agree Andy, though depending on your account settings stop loss orders can be the quickest exit, even in a gap scenario. Many option using traders now work on line to reduce commission costs, but the size of the trade will still be a key to determine whether its a worthwhile strategy.

Comments are closed.