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All posts for the month November, 2014

Okay, that’s a big statement for a decision support platform, even one incorporating machine learning. So let’s begin with the observation that the best performing stocks from the top 100 UK names started this year with high valuation, high yield, low short interest, narrow CDS and low implied volatility. The worst performing stocks showed the opposite characteristics. Which stocks tick those boxes today?

Before we check that, a little theory. The latest GMO quarterly letter argues that QE and zero interest rates favour longer duration assets, such as equities, by pulling future returns into the here and now. On its own, this would suggest outperformance by higher value, lower payout stocks, because the cash flow from these names is more distant and yet is afforded a smaller discount as long term interest rates fall. While the UK has all the old QE money sloshing around, but no fresh printing, long rates have fallen throughout 2014. Yet what we observe is that while high valuation stocks outperformed, so did higher payout stocks, which have a higher yield that shortens the duration of the investment. So far, so mixed a message.

The other factors are easier to explain. We expect higher prices to coincide with lower short interest, CDS and implied volatility and have set OTAS up to flag as divergent the extreme examples of this not happening in each sector. Our expectation is based on extensive back testing, but has theoretical support too. As short interest, credit cost and volatility rise, they all increase the uncertainty about when you are going to get your cash back from an investment. We should expect this uncertainty to be reflected in a lower share price and, throughout 2014, this is precisely what we observe.

Jan 1, 2014
Winners
Losers
Top 100
P/E x 16.0 14.4 14.6
Div Yield 3.1% 2.8% 3.0%
SI % 0.27 0.80 0.32
CDS bps 67 73 73
Imp.Vol. 15.1 21.9 20.6

The winners referred to in the table above are the top 20 best performing stocks this year, while the losers are the 20 worst performers. The average for the index is shown in the final column. The figures all refer to the average level of each factor on January 1, 2014, or what your OTAS Stamps would have shown you back at the beginning of the year. P/E and Yield are based on 12 months forward values, while short interest, CDS and implied volatility are right now.

Yield is much of a muchness, which may explain why the duration argument has not worked so well in 2014. However, on all the other measures, the best performing stocks showed clear blue water between themselves and both the losers and the average stock.

Here is the same analysis for these stocks today.

Nov 26, 2014
Winners
Losers
Top 100
P/E x 19.1 13.7 15.2
Div Yield 3.2% 3.6% 3.4%
SI % 0.35 0.88 0.43
CDS bps 60 76 62
Imp.Vol. 22.2 25.9 23.1

The valuation gap is now more pronounced. Our winners have average EPS Momentum of +0.2%, while the losers average -4.2% and the index as a whole shows -0.4%. The re-rating of the top performing stocks is in recognition of superior growth prospects, which are being reflected now in analysts’ upgrades.

The difference in yield is only slightly more pronounced than it was, with payouts having risen. The premium yield on the losers owes much to the double digit fall in the price of the shares. The winners retain an advantage on the other factors, but the gap to the average share in particular has fallen. It may be time to freshen up the portfolio.

To rank the top 100 stocks today, we have sorted the names by each of the factors and accorded the highest score to the top ranked share in each category. For CDS and implied volatility, where the data set is limited, we have accorded the shares that have no value, the average of those that do have one. The impact of this is to change three stocks in the top 20 list, and to shuffle the order for the others a little, favouring larger stocks, frequently consumer staples plays, with low credit risk and volatility. However, as our starting point was an equally weighted portfolio of winners, constructed purely from absolute price rises YTD, the shuffling of ranking does not matter.

Top 20
Bottom 20
P/E x 18.6 13.7
Div Yield 4.0% 2.4%
SI % 0.16 2.37
CDS bps 60 139
Imp.Vol. 20.6 26.0

The top 20 stocks have a marked valuation and yield premium to the bottom 20, are barely shorted, have far lower credit risk and 20% lower three month uncertainty measured by implied volatility. This looks like a portfolio might be expected to, if it were constructed for the risk of interest rates rising. However, this has not entered into our thinking as this is a bottom up process and the QE comments were largely for fun.

Of course our methodology falls foul of exemplary statistical practice, not least by a type of survivor bias from not taking into account index rebalancing. However, it has the significant positive of being able to be performed by anyone with an OTAS and an hour to spare. The analysis may be done anytime a manager wants to refresh a portfolio and may be used to build a portfolio gradually, a few stocks at a time.

And now, drum roll please, the top 20 stocks of 2015 (maybe). These are in ranking order, Vodafone, GlaxoSmithKline, Astrazeneca, British American Tobacco, Compass Group, Hammerson, Friends Life, Land Securities, United Utilities, Diageo, Centrica, Reckitt Benckiser, Legal & General, Unilever, Imperial Tobacco, HSBC, British Land, Direct Line, Saint James’s Place and SAB Miller.

If you have suggestions about how we might refine our methodology, do please let me know. If you would like to know the names of the stocks to avoid, do likewise. One small disclosure, I own shares of RBS and am pretty happy with the performance of the stock against the other banks this year. However, it is near the bottom of my ranking, which is making me seriously consider taking my profits. And this is precisely what OTAS is designed to do; ask the questions that make you think. A decision support platform.

Short Interest movers: Ophir Energy, Subsea 7, Electro Components, Ashmore

Director Buys/Sells:  Barry Callebaut, Berendsen, Rio Tinto, Compass Group

CDS spread movers: Hammerson, Akzo Nobel, Merck KGaA, Solvay

Implied Volatility movers: Seadrill, Royal Dutch Shell, Atlantia, Intesa Sanpaolo

Stocks trading unusually High Volume today

1

…and names in the news today…2 3

…and finally those with High Volume traded yesterday4 5

6 most positively ranked stocks6

6 most negatively ranked stocks7

Short Interest

Significant risers in past week

8

Significant fallers in past week

9Director Dealings

Recently Reported Priority Trades

STOCK

BUY / SELL

DIRECTOR JOB TITLES

NO. OF DAYS AGO (incl. weekends)

RIO LN Buy Independent Director 1
CPG LN Buy Group Manager 2
BARN SW Sell Executive Director/Committee 1
BRSN LN Sell Managing Director 1
SCHP VX Sell Executive Director/Committee 2

CDS

Significant fall in past week10

Implied Volatility

Significant rise in past week11

Significant fall in past week 12

What to watch for on Monday…13

 

1

The last 6 weeks have been particularly fruitful for luxury stocks. A sharp rally catalysed by Chinese policy loosening and Japanese QE has meant that the losses incurred in October have been made back and now we have returned to business as usual with share prices soaring skywards. As we approach Christmas however, the sector appears stretched on several levels. EPS Momentum is increasingly negative, directors have been net sellers of stock and the average valuation of the sector is now significantly inflated compared to its 2yr average. Is now the time to take profit or will Emerging Markets pull the stocks through what is sure to be a fiercely contested Christmas period?

Valuation

The average P/E of the sector is now at 18.8x 12m forward earnings, a level which is just shy of 2 year highs. From the graph we can see that each time the sector has reached such a level, it has undergone a significant dereating.

2

Stocks that are currently flagging as having high valuation include MC FP, CFR VX, ADS GY and BRBY LN. Out of those stocks, MC FP has the most stress points.

  • Stock continues to experience negative sentiment from analysts.
  • Stock is now trading at multi year highs relative to where it normally trades against the wider sector on a 12m Fwd P/E basis.
  • Short interest has risen by 60% over the past 5 days. Implied volatility has also risen by 10% over the same time frame.
  • Over the past month, we have seen price become dislocated from EPS estimates, Short Interest and Implied Volatility.
  • Dividend offering little comparative value.

EPS Momentum

Over the past month, earnings estimates have become increasingly negative across the Luxury sector. TOD IM, SFER IM, BOSS GY and 1913 HK have seen their EPS estimates fall by more than 2% over the past month, with TOD IM having bottom decile earnings momentum when comparing it to the wider sector.    3 Director Dealing

Directors have been net sellers of stock over the past month across the sector, with RL US and UHR VX directors selling large portions of stock. In the case of UHR VX, an undisclosed Level A director sold 500k CHF worth of stock and over the past  2 years, transactions of this sort have been followed by a fall in the stock’s share price, as seen below.

4 Short Interest

Short interest across the sector has risen sharply over the past week, with the average level now approaching a level not seen since June. The median level of FFS on loan now stands at 3.59%.

5                          MC FP has see the highest increase in its short base over the past week however this will be due to the impending dividend issue. More genuine increases in short interest can be seen in 3389 HK and SFER IM, with the latter stock exhibiting significant dislocation between 1 month price change and short interest increases.6For reference: SFER IM short interest – now approaching 2 year high. Days to cover stand at 4.9, so limited scope for short squeeze here.7

 

Short Interest movers: Outokumpu, Fresnillo, Jcdecaux

Director Buys/Sells: London Stock Exchange, Kone, Adecco

CDS spread movers:  Kering, HeidelbergCement, ThyssenKrupp

Implied Volatility movers:  LVMH, Leoni, Essilor International

Stocks trading unusually High Volume today

1

 

…and names in the news today…2 3

…and finally those with High Volume traded yesterday4 5

6 most positively ranked stocks6

6 most negatively ranked stocks7

Short Interest

Significant risers in past week8

Significant fallers in past week9

Director Dealings

Recently Reported Priority Trades

STOCK

BUY / SELL

DIRECTOR JOB TITLES

NO. OF DAYS AGO (incl. weekends)

ADEN VX Sell Executive Director/Committee 1
KNEBV FH Sell Executive Board 1
GENL LN Sell Chairman of the Board + CFO 2
LSE LN Sell Executive Director 2
ZOT SM Sell Executive Chairman 2

CDS

Significant rise in past week10

Significant fall in past week 11

Implied Volatility

Significant rise in past week12

 

Significant fall in past week13

What to watch for on Friday…14

With the abrupt departure of UTX’s CEO yesterday after 22 years in charge and replacement with the CFO as well as subsequent analyst upgrades, we look to OTAS to see what effect this will have on the stock.

The stock outperformed the industry group and market yesterday on high volume post the news and analyst upgrades and is now retracing from the lows vs. the industry group. Additionally, the options market is pricing in potentially bullish positioning as both the Downside Skew and the Put Ratio have decreased, implying investors are paying less for downside protection and transacting less in puts and more in calls. UTX had high options volume yesterday as well and we can see in the Top Ten Traded Volume that there was heavy activity in the FEB15 and JAN15 out of the money calls. Valuations are also at very inexpensive levels relative to the industry group, a discount to the industry and back at a multi-year low.

Monthly Price Performance:1

Price Performance Vs. Industry:2

Price Performance vs. Industry and Market: 3

The options market, while flagging as high implied vol vs. the industry group, shows bullish positioning as investors are removing risk by placing less downside bets:

4 5

Downside Skew has decreased dramatically over the past day, implying investors are paying less now for downside protection: 6

The Put Ratio, which measures total put activity over the total calls and put activity, is showing that the ratio has come down, implying people are transacting more in calls: 7

We see heavy activity in out of the money calls, implying further upside to the stock: 8

 

Despite the recent price rise, the valuations are still flagging as attractive relative to the industry group; at 8.3x 12M Fwd EV/EBITDA, this is a 7% discount and a multi-year low:

9 10

Short Interest movers: Enel Green Power, Gemalto, Alcatel-Lucent

Director Buys/Sells: Meda, Schibsted, Meggitt

CDS spread movers: Clariant, Hellenic Telecommunications, Banco Popolare di Milano

Implied Volatility movers: Siemens, Delhaize Group, Nutreco

 

Stocks trading unusually High Volume today

1

…and names in the news today…2 3

…and finally those with High Volume traded yesterday4 5

6 most positively ranked stocks6

6 most negatively ranked stocks7

Short Interest

Significant risers in past week8

Significant fallers in past week 9

Director Dealings

Recently Reported Priority Trades

STOCK

BUY / SELL

DIRECTOR JOB TITLES

NO. OF DAYS AGO (incl. weekends)

ICA SS Buy Key Executive 2
MEDAA SS Buy Director 6
SCH NO Sell CEO + CFO 1
MGGT LN Sell COO 1
DWNI GY Sell Chairman of the Supervisory Board 2
UTDI GY Sell Non-Executive Vice Chairman 5

CDS

Significant rise in past week

10

Significant fall in past week 11

Implied Volatility

Significant rise in past week12

Significant fall in past week 13

What to watch for on Thursday…14

Short Interest movers: Enel Green Power, Abengoa, Telecom Italia, Schibsted 

Director Buys/Sells: Orkla, Raiffeisen, Schibsted, Banco Santander

CDS spread movers: Air France, Erste Bank Group, Technip, KBC Group

Implied Volatility movers: Banco Popolare, Intesa Sanpaolo, Syngenta, Fiat

Stocks trading unusually High Volume today

1

…and names in the news today… 2 3

…and finally those with High Volume traded yesterday 4 5

6 most positively ranked stocks6

6 most negatively ranked stocks7

Short Interest

Significant risers in past week8

Significant fallers in past week 9

Director Dealings

Recently Reported Priority Trades

STOCK

BUY / SELL

DIRECTOR JOB TITLES

NO. OF DAYS AGO (incl. weekends)

RBI AV Buy Director 1
ORK NO Buy Deputy Chairman 1
ELE SM Buy General Director 4
GLEN LN Buy Shareholder 4
ADEN VX Buy-Sell Executive Director/Committee 1
SCH NO Sell Executive Committee 1
IBE SM Sell Group Director 4
SAN SM Sell Executive Vice President 4
INTU LN Sell Controller 4
HSBC LN Sell Substantial Shareholder 7

CDS

Significant rise in past week

10

Implied Volatility

Significant rise in past week11

Significant fall in past week12

What to watch for on Wednesday…13

BT shares are reacting favourably to the news that the group wants to re-enter the mobile market, as part of a strategy to offer bundled packages to consumers, reducing the risk of defection and maximising the value of the group’s heavy investment in content. BT looks set to gamble on quadruple play, which creates an interesting strategic and share price contrast with Vodafone.

BT’s valuation is now at very high levels relative to peers, but EPS Momentum has turned positive and the shares remain below the longer term trend in EPS Momentum. BT is attempting to pull off a similar re-rating trick to that accomplished by Vodafone, at a time when the latter’s earnings profile means it is entering the delivery phase of its transition.

1On an EV/EBITDA basis, BT on 5.4x 12 months forward is at a 6% premium to the telecommunications services sector, which is an unprecedented level. In absolute terms its rating has been higher, at 6.4x during Q2 this year and over 6x from April through October 2007. The current level is a 13% discount to the UK market. 2EPS Momentum is +0.2% for BT, having turned positive this month. The chart above shows that the share price tracks the trend in 12 months forward earnings rather well and that arguably the shares are a touch under trend at the moment. On a PE basis, at 60% of the sector, BT’s valuation is at depressed relative levels and the 5% discount to the market is at the lower end of its average range.

The move into mobile may be the catalyst to trigger a re-rating of the shares. Vodafone, which shows little interest in quadruple play (mobile, broadband, fixed line and TV), has re-rated from a 40% PE discount to the sector at the beginning of the year to a 55% premium, as a result of its cash return and expansion plans funded by the disposal of its US business. EPS Momentum at Vodafone is an impressive +4.4%, which is in the top 10% of the sector across Europe. However, now that the earnings adjustment to the new group structure is complete, it may be time for a reckoning between the share price and earnings trends, which has happened already this year.

3Over the past year, BT has outperformed Vodafone by 8%, but as recently as mid October its outperformance was twice the current level. The telecoms companies are placing big bets on changing consumer behaviour, with uncertain outcomes for both them and investors. The latter have shown a willingness to buy a compelling story about corporate change. BT may be taking its turn in the limelight as storyteller supreme.

 

 

 

 

 

 

 

 

 

 

 

 

Shortly after the market closed on Friday, Aviva and Friends Life announced the terms for a merger, noting at the top of their release, the recent press speculation into the deal. The speculation was more than in the press, with Friends’ share price outperforming markedly last week on unusually high volume on three out of five days. In contrast, Aviva was a modest under performer on average volume, until today. This tells us a great deal about the nature of speculation into M&A activity, which takes on the characteristics of punting as opposed to arbitrage.

1The OTAS Stamp view for Friends Life (above) shows that the stock outperformed peers by 3.4% last week and that volume increased as the week progressed, reaching unusually high levels on Friday compared with the 30 day average. Short interest fell 7% over five days, returning it to almost flat over a month, suggesting that a number of recent shorts may have reversed course. There is no liquid exchange traded market for options or CDS on Friends, which could have provided additional insights.

Volume did pick up in Aviva during the week, although it was not exceptional compared to the recent average levels. The TradeShaper Microstructure chart for Friday shows that volume was on the upper limit of the expected level.

2

However, the Microstructure also reveals that the shares performed as expected over the course of the day, which we measure by plotting the intraday price against a basket of the most closely correlated shares.                                                      3

A similar chart for Friends Life shows that the shares rallied strongly right at the end of Friday’s session. 4

While the volume of Friends shares traded was above average throughout the day, the net traded volume graph below shows that only right at the end of the trading day was there any noticeable net buying. Those speculating on a deal being done managed to place their bets before the market closed, even though the announcement confirming the deal came only afterwards. While this activity may well have included short covering, as the risk of an announcement had clearly risen given the speculation in the press, short interest in Friends had reduced throughout the course of the previous two weeks. 5

As I write Friends is up a little under 6%, but since the opening print it is down relative to a basket of peers, in part because of the fall in the Aviva share price and with it the value of the deal. There is exceptionally high volume trading in Aviva shares today, which the TradeShaper dynamic prediction currently expects to be 33mm shares, equal to 5.3x the mean expected volume. This indicates that the arbitrage players have entered the market only after the confirmation of the deal terms, which allows them to construct trades accurately.

As an aside, it is worth noting the tick down in the Aviva CDS on Friday, coming on the back of a 7% rise over the previous five days. One rationale for the deal is to allow the cash flow generated from Friends’ business to reduce gearing and improve the dividend cover at Aviva, as well as fund growth.

TradeShaper dynamic intrade analysis may be used by market participants to evaluate emerging stories, in this case driven by press speculation. It would appear that those prepared to bet on a deal taking place were biased to the upside, i.e. taking long positions in Friends Life or closing shorts, as opposed to arbitrage experts who have only entered the market today. The confidence of those making long bets appears to have dramatically increased late on Friday afternoon, which in itself would have held a message for those following this situation closely. TradeShaper Alerts also flagged this exceptional activity to those trading UK shares more passively, enabling them to investigate the situation while the market remained open.

 

Short Interest movers: Subsea 7, K + S, Seadrill, Kuehne + Nagel

Director Buys/Sells: Swatch Group, CHR Hansen Holding, Galencia, Publicis Groupe

CDS spread movers: Air France, Mediobanca, Rio Tinto, KBC Group

Implied Volatility movers: Syngenta, Atlantia, Eni, Unicredit

Stocks trading unusually High Volume today

1

…and names in the news today… 2 3

…and finally those with High Volume traded Friday 4 5

6 most positively ranked stocks6

6 most negatively ranked stocks7

Short Interest

Significant risers in past week8

Significant fallers in past week 9

Director Dealings

Recently Reported Trades

STOCK

BUY / SELL

DIRECTOR JOB TITLES

No. of DAYS AGO

CHR DC Buy CEO 2
GBLB BB Buy Non-Executive Director 5
CRDA LN Buy-Sell Treasurer 2/3
NRE1V FH Buy-Sell Director 3/4
SDRL NO Buy-Sell Substantial Shareholder 3/4
UHR VX Sell Executive Director/Committee 1/2
PUB FP Sell Supervisory Board 2
GALN VX Sell Executive Director/Committee 2
KNIN VX Sell Executive Director/Committee 3/4
SCHP VX Sell Executive Director/Committee + Non-Executive Board Member 3/4/5
ZOT SM Sell Executive Chairman 3/4/5
NK FP Sell Non-Executive Director 4/5
RUI FP Sell Managing Partner 5

CDS

Significant rise in past week

10

Implied Volatility

Significant rise in past week

11

Significant fall in past week 12

What to watch for on Tuesday…13