Short-sellers target engineers
Mining services companies are increasingly becoming the targets of short-sellers, as hedge funds swoop in on the industry as drilling contracts dry up.
Retail and media stocks remain the big hedge fund favourites, but engineering companies are also being targeted, with Transfield, UGL and Boart Longyear joining the S&P/ASX 200 Index's top 20 most shorted stocks in the past six months.
Engineering companies Bradken and Monadelphous are also on the list, Australian Securities and Investments Commission data shows. Hedge funds hold at least 10 per cent of the shares of all these companies, except Bradken.
Platypus Asset Management founder Donald Williams said short-sellers were responding to the negative sentiment weighing on the drilling and engineering sector since late last year, as the resources boom started to fade.
"It is a reflection of the view that the mining boom is over," he said.
But while the outlook for mining services remains weak, Mr Williams said much of that sentiment had already been factored into prices, making the short positions a bigger gamble.
"If you're shorting them here, you're pretty late to the party," he said. "The down move has been substantial and a lot of them are pretty cheap. You're basically expecting them to go broke."
Short-selling is when hedge funds and other investors borrow shares they do not own and sell them in the hope their price will go down. If it does, they buy back the shares at the lower price, return them to their owner and pocket the difference.
Bell Potter head of research Peter Quinton said hedge funds were responding to a report by UBS analysts this week, which forecast a 20 per cent global decline in mining company capital expenditure in calendar 2014.
"Just because the share price is down a lot already doesn't mean it couldn't go a lot lower," he said.
"When someone tells you global capital expenditure is going to fall by 20 per cent in a year, you've got to ask yourself, 'do I want to be exposed to those companies?"'
Engineering services group Transfield reported a heavy $250 million loss for the year to June, hit by impairment charges. Drill contractor Boart Longyear flagged further cuts amid the ongoing contraction in mining activity. It posted a net loss of $US329 million, down from a net profit of $US98 million a year earlier.
Hedge funds have been forced to change some of their favourite bets after a number of heavily shorted companies produced positive earnings for the 2013 financial year.
Flight Centre, a favourite due to the expected decline of bricks-and-mortar travel agencies, surprised short-sellers last month when it reported a record $246 million profit for the year to June.
Fairfax Media remains the most shorted company on the S&P/ASX 200, with 14 per cent of stock held by hedge funds. Myer is second with 13.4 per cent.