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Could the slump in BHP shorts lead to 52-week highs?

Mon 07 Feb 22, 4:49pm (AEST)
person wearing hard hat standing in front of big yellow mining truck

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Key Points

  • BHP consolidated its dual-listed structure last week
  • Trading volume was 10x higher than usual as index funds scrambled to rebalance
  • Leading up to the merge, BHP shorts rose to all-time highs
  • Shorts fell soon after, which could drive the stock up, says a senior analyst at Shaw and Partners

The unwinding of BHP (ASX: BHP) shorts could nudge the company to a 52-week high, says Peter O’Connor, a senior analyst at Shaw and Partners. 

There’s still another week until BHP announces the company’s half-year results on 15 February, but the stock is already heating up thanks to the recent unification between its UK and Australian branches. 

Previously, the mining giant had a dual-listed company structure that traded on the ASX and the London Stock Exchange (LSE). However, BHP’s Australian listing has now swallowed up its UK-counterpart. 

The unification - which went official on Monday 31 January – saw the company’s ASX 200 weighting rise from 6.2% to about 12%. BHP's new $239.9bn market cap also saw the miner overtake Commbank (ASX: CBA) to become Australia's largest public company.

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Friday frenzy: index funds rush to match weight adjustments

On Friday 28 January (the last trading session before the changes), index funds such as Vanguard Australian Shares (ASX: VAS) scrambled to rebalance their portfolios to match BHP’s bolstered weighting. 

This skyrocketed BHP’s trading volume. On Friday, 327m units traded hands (10x more than the company’s 4-week average). 

Short positions rise

Leading up to the merger, short positions spiked in BHP. 

On Friday 28 January, a staggering 17.63% of the shorted was shorted – a record for the stock:

BHP short positions over the last year
BHP shorts over the last 12 months. Note: data is delayed by 4 business days due to reporting rules. (Source: ShortMan)

 

The spike came from institutional investors playing the spread between BHP’s ASX stock and the LSE stock, thanks to the UK stock trading at a discount to its Australian counterpart. 

Now that the merger is complete, this arbitrage opportunity has passed. 

In what must come as a sigh of relief for BHP, short positions have dropped substantially, down to a more reasonable 2.28% as of 4 February. 

Mining - Two workers in hard hats and high vis walking through a mine site

How the unwinding shorts will impact the stock

Usually when we see this level of short unwinding, a company’s share price typically goes from a 52-week low to a 52-week high,” says O’Connor. 

But it's worth noting that the stock is currently trading 31.69% above the 52-week low, and there's an inverse correlation between shorting and share price appreciation.

Hence, O’Connor’s projection of a 52-week high may be a possibility. 

On Tuesday 8 February, the stock was just -0.51% below the previous 52-week high of $49.40, which came on 4 August 2021. 

Right now, BHP is about -2.4% down from this peak. 

What will come next?

Most of the impact of the merger should now have abated. 

However, O’Connor says that a minority of institutional investors have yet to fully rebalance their funds to match BHP’s new weightings. With BHP enjoying a recent rally (up 3.26% since the merge), this could pose headaches for fund managers, who could be forced to spend more to rebalance compared to managers who re-weighted in late January. 

With the merger over, all eyes now turn towards BHP’s earnings report for the half year ending in December 2021.

The results are expected on 15 February

image

 

BHP share price movement over the last 12 months.

What do brokers think?

Citi and UBS last updated coverage for BHP on 3 February:

  • Both posted NEUTRAL ratings and target prices of $42 (-13.10% downside to the current price). 

However, Peter O'Connor from Shaw and Partners has a different view:

  • O'Connor has indicated a target of $48 (just 33 cents shy of today’s price).

  • He says he has held this target for the last 6 months. 

Citi expects a full year dividend of $3.87

An important dividend note:

Most brokers expect BHP to distribute cash from the sale of its petroleum business to Woodside (ASX: WPL) directly to investors through dividends.

This would follow the same modus operandi that BHP used when the company sold its US onshore oil and shale gas business to BP and Merit Energy in 2018 for $14.6bn. 

However, no broker projections currently include this extra dividend, as the merge is not yet complete. (Completion is targeted for Q2 2022).

Written By

Jed Herne

Content & Strategy

After graduating with a 99.4 ATAR, Jed won 3 scholarships to Curtin University, where he earned his Bachelor's degree and served as a Student Ambassador. He is primarily interested in long-term passive index funds as a vehicle for financial independence. Outside of covering financial news, Jed is a published author, podcaster, and has an unhealthy obsession with bouldering.

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