Most shorted ahead of earnings

A review of how short sellers are positioning themselves ahead of earnings announcements in the coming week.

• Perennial short targets Zoe's Kitchen and Chesapeake prove more profitable in 2016
• Shorts attracted to Delta Lloyd as firm suspends dividend and conducts rights issue
• Record high short interest at Noble Group as shares stabilise ahead of earnings

North America

Most shorted ahead of earnings in North America is Zoe's Kitchen with almost half of its shares sold short. A longtime favourite among short sellers, shares in the restaurant franchise chain have fallen by a further 26% since last ranking as the most shorted.

Speciality finance company Encore Capital Group is the second most shorted ahead of earnings in North America with 39% of shares outstanding on loan. Shares have plummeted by almost half in the last six months with the company posting a net loss in the previous quarter.

Iconix Brand Group, the owner of fashion brands such as Ed Hardy, Pony and Umbro has attracted a surge in short interest since announcing the restatement of the company's finances in November 2015 and receiving notice from the SEC that it is under formal investigation. Short selling has almost doubled with 38% of shares outstanding on loan currently. Shares have fallen by 80% in the past 12 months.

Shorts continue to take profits in a very profitable short trade in Chesapeake Energy Corp. The stock fell almost 80% in 2015 and has continued to do so in 2016, down by 56% year to date with just under a third of the company's shares remaining out on loan.

Europe

Most shorted ahead of earnings for a consecutive year in Europe is Aixtron with 21.5% of shares outstanding on loan. Shorts sellers have increased positions by 28% in the last 12 months while the stock price has halved.

Second most shorted ahead of earnings in Europe is Dutch insurance company, Delta Lloyd with 20.7% of shares outstanding on loan. The firm announced suspension of its FY15 final dividend and a rights issue to transition the firm to the "Solvency II regime".

Third most shorted ahead of earnings in Europe is Petrofac with 13.5% of shares outstanding on loan. Since August 2015, short interest has jumped higher by 21%, while the stock has continued to slide further, down 16% which has created some attractive dividend yields.

Drax Group operates the UK's largest coal fire power station and has seen short interest spike higher to 12% of shares outstanding ahead of earnings.

Asia Pacific

Most shorted ahead of earnings in Apac is fast growing Vocus Communications with 38.5% of shares outstanding on loan.

The Australian telecom network has seen shares rally by 40% in the last 12 months. This impressive rise has however, attracted short sellers who have increased positions six fold in the same period, reaching 39% of shares outstanding on loan.

Short sellers continue to hold positions in Noble Group which is the second most shorted in Apac.. The firm came under increased scrutiny in 2015 but the outlook for the firm has since improved, with the CEO reaffirming that no changes will be made to the firm's dividend policy for FY15.

Due to positive cash flow and improving financial health, Markit Dividend Forecasting is currently forecasting the company will maintain the low end of its target payout ratio.

The outlook for WorleyParsons has been subdued by the downturn in the commodity and energy market. Currently there are 15% of shares outstanding on loan, while the share price has plummeted by almost two thirds in the last 12 months. The heavy civil and engineering firm is exposed to large capital projects across the mining and oil industry in Australia. With elevated debt levels and net debt/equity above 60%which surpasses its peers, Markit is not anticipating any recovery in the company's dividend growth momentum.

LED and semiconductor maker ASM Pacific Technology currently has 10% of shares sold short and shares have fallen by a quarter in the last 12 months. Markit Dividend Forecasting expects to see a dividend cut this year after the firm posted a 33.4% contraction in billings last quarter as customers cut budgets and delayed orders.

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Relte Stephen Schutte, Analyst, Markit
Tel: +44 207 064 6447
relte.schutte@markit.com

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This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.