Nufarm: Short the Short

The Nufarm Limited (ASX:NUF) register is looking decidedly tight. Possibly the tightest of any company in the ASX200. And this has accelerated over the past few weeks to the point that it has dominated volume and impacted upon price.

Whilst released data is 4 days behind, at the time of writing, there were approximately 61m shares short-sold of a total of 379m, equalling a massive 16.07% of issued capital. This is now the 3^rd most shorted company on the ASX.

And interestingly, according to the Short Man website (www.shortman.com.au ), this has accelerated over the past few months and again this past week.

With the volume this month clearly impacting upon price – ie short-selling has been consistently averaging in excess of 60% of daily turnover. This is simply unsustainable.

A closer look at the registry, also produces some further points of interest. Firstly, two long term shareholders in the form of the Sumitomo Chemical Company and the ag-centric Ellerston Capital, account for approximately 30% alone. In other words, if the 16% of shorts in the market needed to cover, they would only really have a free float of 70% to buy from, meaning the real short ratio is closer to 23%.

But if that wasn’t interesting enough, the Top 20 shareholders in Nufarm own a massive 86% of all stock on issue, up more than 5% from the preceding month. If the Top 20 shareholders ‘held their nerve’ and refused to sell any shares, then there would not be enough shares remaining on issue to cover all the short positions. And that would make for a very interesting ‘squeeze’ indeed!

A brave move from the short sellers

The large increase in short positions is a brave and somewhat curious move at a time where one could reasonably argue that the share price already reflects maximum bad news and at a time where heaven forbid, something could actually go right. For example, WA has experienced large rainfall in the past week, with more on the way.

The obvious explanation is that short-sellers are positioning themselves to be able to ‘buy back’ their stock via a placement or the like, should Nufarm be required to shore up its balance sheet as some have postulated.

If this was the case, it would be particularly disappointing for existing Nufarm shareholders for three reasons:

1. Firstly, existing shareholders would hope that management would not have placed themselves into such a position where they are required to raise capital at close to a 5 year low, as this accentuates dilution.
2. Secondly, existing shareholders would hope that if a capital raising was required, it would be via a rights issue to maximise their own benefit
3. And finally, to enable short-sellers access to a capital raise would amount to rewarding those who have contributed to driving the price to this level.

We are of the view that these reasons are too compelling for management to go down this path. Which leads us to our opening thought... to short the shorts and go long!