Looking at the Household and Personal Products sector in the S&P 500 with earnings coming up in the next couple of weeks, we are starting to see signs of strain despite the recent price rally for the group. Given the cyclical nature of these names and exposure to the strong dollar, OTAS can highlight when risks are appearing. We discuss two of the stocks below, AVP US and CLX US.

AVP US: Reports Q3 earnings tomorrow and stock has sold off recently, down 3.29% vs. the industry over the past week and 23.8% YTD. The stock is currently trading at a 2 standard deviation low vs. the industry, a multi-year low:

Analysts have been negative on earnings expectations for the past 6 months and the stock is now in the bottom 10% of the industry. The stock de-rated again over the summer:

Implied vol vs. the industry is flagging as over 2 standard deviations high, 2.8x the industry average and we’re seeing activity in the near dated out of the money DEC14 calls suggesting limited upside:

Short interest remains elevated above 2 standard deviations and at 9.88% of free float, near a high for the year. However, it is not the most shorted of its peer group:

CLX US: reports earnings on Friday and the stock has recovered vs. the industry group by .17% over the past week and is up 5.1% vs. the industry MTD. The stock/industry spread is currently trading at over 2 standard deviations, a multi-year high:

Fundamentals are flagging as unattractive with valuations at over 3 standard deviations higher than normal vs. the industry and at 1.19x the industry average while the dividend is flagging at 2.6 standard deviations lower than historical levels and only 1.48x covered:

Implied vol is over 2 standard deviations high and at a multi-year high vs. the industry group. While we have seen the put ratio come down, suggesting people are transacting more in calls, we see the recent activity in the out of the money JAN15 calls is showing limited upside:

CDS levels are still elevated on a historical basis and are the highest among its peer group, as well as divergent with the price:

Looking at the retail sector, we have seen some extreme underperformers over the past month, none as sharp as retail giant KSS US. After outperforming the market over the past 3 months, KSS US has erased most of its gains, heading into the pivotal holiday season. Interesting to note that over the past 3 months We have seen analysts consistently taking numbers down. What will be in store for next month?

If we look at the price chart over the past month, we see the that the market is up slightly, however KSS US has underperformed dramatically

Investors have taken note as the short interest on KSS US has reached extremely elevated levels. Currently the short % of free float share on loan is 16.25%, while the days to cover is 9.26.  Over the past 6 months we have seen the short interest increase; KSS US has now reached historical highs over the past month.

According to a recently conducted report by EY, 69 UK companies issued profit warnings in Q3 this year. That is the highest quarterly figure since 2008 and offers a wake up call to the perhaps overly ambitious (or in some cases, dishonest) executives that have overestimated the strength of Britain’s economic recovery. After the market sell off a couple of weeks ago, many share prices have begun the road to normality – however does this apply to those stocks still licking their wounds from below forecast earnings? What does the Christmas period have in store for some of these names?

From a top down perspective, there are no real surprises considering the stocks in question: low valuation, high short interest and negative EPS momentum. Implied volatility (limited coverage) has started to retreat from recent highs, as has CDS however both appear to be trading at the upper ends of their 1 year ranges.

By digging deeper though, we can uncover those stocks that have seen the most pronounced reductions in a variety of risk indicators including short interest and by doing so narrow down the list of stocks that may be beginning the road to recovery as we approach the Christmas season.

TATE LN gave its second profit warning of the year in September and fell 18% in the process. Now though, the stock is starting to show small signs of life.

We can see that EPS estimates remain negative, however analysts no doubt continue to readjust their estimates following recent turbulence. Directors have started buying stock, and short interest has come down by nearly 20% over the past week. CDS has also moderated slightly, however continues to trade above 1 year averages. With earnings in 9 days time, a small surprise could yield a significant recovery in the short term performance of the stock.

ASC LN has also had its fair share of bad news this year with profit warnings, warehouse fires and an unseasonably warm autumn. However, following a 65% drop in its share price since January, there are some small signs of hope for the distressed web retailer.

Earnings 7 days ago resulted in a modest recovery with the stock up nearly 10% over the course of last week. 2 directors. including the newly appointed COO, bought stock immediately after the earnings release and short interest has come down by 4% over the past week. The stock continues to trade at a whopping 45x earnings, although such a valuation is actually well below its average rating against the market and the sector. EPS estimates have been increased by 1% over the past week and analysts could yet increase their estimates in the coming weeks as the stock introduces new management in the lead up to Christmas.

In addition to those stocks in the recovery ward, there are a few who remain on the operating table.

HL/ LN has seen its short base rise by 14% over the past week, despite share price performance being positive (+3%) and a technical buy signal firing on Friday’s close. EPS momentum is highly divergent to 1 month price performance as well as the mentioned increase in short interest.

Finally, there seems to be little light at the end of the tunnel for TSCO LN – EPS Momentum continues to lie in the bottom 10% of the sector and CDS has blown out significantly over the past 5 days to its highest ever level. Price targets continue to be cut and the stock is trading at a 1 standard deviation premium to where it normally trades against the wider sector. The stock goes ex dividend in 2 days time and is offering a below par dividend yield of 3.4%.

A brief outline of all the key investment metrics for the STOXX 600 index. OTAS highlights stocks that are showing significantly positive or negative flags, including short sentiment, company director dealings, credit risks, as well as activity in the option markets. Also shown are names where analysts are notably bullish or bearish, and whether the sector-relative valuation is looking stretched or inexpensive by historic standards. The priority events schedule for the following day is attached at the bottom of this note.

Positive flags

Negative flags

Short Interest

Highest free float shares on loan

Highest days to cover

Significant rise in past week

Significant fall in past week

Director Dealings

Trades in the past week

CDS

Highest CDS

Significant rise in past week

Significant fall in past week

Implied Volatility

Largest expected three month price move

Significant rise in past week

Significant fall in past week

EPS Momentum

Top 10% Momentum in sector – 53 STOCKS

Bottom 10% Momentum in sector – 33 STOCKS

Valuation

2 sd below average relative metric – 11 STOCKS

2 sd above average relative metric – 61 STOCKS

Wednesday’s Events