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All posts for the month November, 2014

 

The prediction in Barron’s of a 30% rise in Intel shares by the end of 2015 has unsurprisingly gained much media attention. The argument is that the current EPS Momentum will be maintained, pushing forward estimates through $3 per share, which at the prevailing 16x, would merit a 30% rise from the current share price. An investor might take issue with a high forward multiple being sustained, even after a period of unusual EPS growth has been delivered, and we may use OTAS to assess how likely this will be.

Current estimates for EPS at Intel for years ending 2014 through 2016 are $2.24, $2.38 and $2.66. One month EPS Momentum in 12 months forward estimates is 0.9%, which compares favorably with the NASDAQ average of -0.1% and the semi sector of -0.4%. Year three estimates, for 2016, have already experienced larger upgrades than for the preceding two years, indicating that some of the potential sources of good news in the Barron’s article may have been taken on board by analysts.

Intel’s share price has tracked the trend in 12 months forward EPS closely over the past two years. Over the longer term, there are considerable periods when this relationship breaks down. The share price is temporarily above the trend in earnings.

1The Intel forward PE of 15.1x is only marginally above average over the past 8¾ years, although at just over parity to the semiconductor and semi equipment sector in North America, is elevated compared with the 10% discount that Intel has averaged. Furthermore, if we eliminate the elevated PE during the financial crisis and look back five years, Intel is as highly valued as it ever was. 2On an EV/EBITDA basis, which for many is a preferred way of assessing the sector, Intel trades at 6.8x, which is at the very high end of valuation over the past two years and only marginally below the top end of the average range over the past 8 years. EBITDA margins are forecast to peak in 2014, which explains the peak EPS growth in the current year.

Thus while maintaining 16x forward estimates is conceivable for Intel, given the highest multiple paid for a stock is typically at the peak of earnings growth, this suggests that it may be difficult to sustain so high a rating as EPS growth slows. Another constraint on performance may be the rating relative to peers, which is already above historic levels. The largest companies may trade at discounts to their sector, because size alone makes it difficult to match the growth of more agile peers.

Barron’s tells us that Intel shares are halfway to the doubling it predicted in June of last year. Since then the sector has been on a rip, outperforming the market by over 20% points, while Intel has merely kept pace with peers. The re-rating of Intel shares over that period relative to the sector is because its EPS has grown more slowly, suggesting investors are discounting future growth already. This may mean that the easier half of Barron’s prediction has already come to pass.

Those who are tempted to take the journal’s advice and stay invested for another year would appear to be assuming that the most bullish industry estimates will become the consensus, and that the outperformance of the sector as a whole will continue. For those that expect out performance from semis, the option market predicts the widest range of three month share price to be at solar plays Trina, JA Solar, SunEdison, SunPower and First Solar. Other share prices with more potential upside than Intel according to option investors include Advanced Micro Devices, Skyworks and Micron Technology.

Short Interest movers: Balfour Beatty, Fresnillo, Fugro 

Director Buys/Sells: Swatch Group, KBC Group, Umicore

CDS spread movers: Infineon Technologies, Technip, Erste Group Bank

Implied Volatility movers: TELE2, Merck KGaA, RWE

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

Trades in the past week

STOCK

BUY / SELL

NUMBER OF DIRECTORS

DIRECTOR LEVEL

No. of DAYS AGO

LXS GY Buy 2 A/C 1/4
IAP LN Buy 1 A 2
REL LN Buy 1 C 3
NRE1V FH Buy 1 A 3
ABBN VX Buy 1 A 3
ICA SS Buy 2 B 4
EVK GY Buy 1 A 4
GPOR LN Buy 1 C 4
BPE IM Buy 1 A 4
ABI BB Buy 2 A/C 4/5
CDI FP Buy 1 A 5
POP SM Buy 1 H 5
ABG/P SM Buy 1 C 5
SY1 GY Buy 1 A 5
BAS GY Buy 1 A 5
RIO LN Buy 1 C 5
KNEBV FH Buy 1 A 5
NRE1V FH Buy-Sell 1 A 2/3
SDRL NO Buy-Sell 1 H 3/5
UHR VX Sell 1 A 1
KBC BB Sell 1 A 3
UMI BB Sell 1 A 3
SCHP VX Sell 1 A 3/4
GTO NA Sell 1 B 4
SAMAS FH Sell 1 A 4
KESBV FH Sell 1 B 4
ULE LN Sell 1 B 4
BARC LN Sell 1 B 4
SKG ID Sell 1 B 4
ZOT SM Sell 1 A 4/5
RUI FP Sell 1 H 5
CSGN VX Sell 1 A 5
SCH NO Sell 1 H 5
TIT IM Sell 1 C 5

CDS

Significant rise in past week

10

Significant fall in past week 11I

Implied Volatility

Significant rise in past week12

Significant fall in past week 13

What to watch for on Monday…14

A month ago I ventured that the worst may be over for oil. This reasonably rare foray into the world of commodities was in fact an observation based on the equity markets and specifically the volatility of the Oil & Gas Exploration & Production ETF. The security is up almost 4% in the past month, albeit still lagging the market, but this week has seen a change in fortunes.1

Implied volatility remains very elevated compared with the last two years, which reflects a great deal of uncertainty around the direction of the oil price. Option investors are saying that by the middle of February, the sector ETF could be up or down over 18% from here. The average range for the S&P 500 is 2

Turning to the whole Energy sector in the US, the option market is predicting a three month range of +/-17% for the average share. 27 shares are expected to be more volatile than usual compared with peers, while only 12 have low relative implied volatility and the reduced uncertainty that this entails.

The average cost of credit in the CDS market for the Energy sector has risen through 100 this week and remains unusually high on a one year view, although it is about average over the past two years. Five companies have seen an unusually rapid rise in CDS this week; EOG Resources, Energy Transfer Equity and the related Energy Transfer Partners, Halliburton (not unusual for a bidder) and Parker Drilling. In addition, four stocks have an unusual divergence in share price and CDS over the past month; Enterprise Products has seen a rising price and CDS, while Occidental Petroleum, Pioneer Natural Resources and Marathon Oil had a falling price and CDS.

Among the latter three, my attention was grabbed by Occidental because the CDS has narrowed this week, at a time when the average for the sector was widening. Occidental flags as expensive on 5.5x EV/EBITDA relative to peers, but has suffered 10% downgrades this month and 19% over the past three. This has left the trend in 12 months forward EPS estimates below the trend in share price. However, a look at the long term trend allays the fears that we might have about this.

3

The last time that analysts’ expectations became seriously divorced from the share price was in early 2009. The stock bottomed in November 2008 and in spite of a wobble in February as the oil price bottomed out, investors sustained the uptrend anticipating better times that analysts did not begin to forecast until April.

The oil price has stabilized in recent days, which may have encouraged early investors to venture back into the shares of Occidental, which is flat against the market this week following 12 months of cumulative underperformance. The PE of 14.3x on the shares has been higher only briefly in the past eight years, but this was in March 2009 when analysts were busy looking backwards and investors were already buying. The price spread against the sector is just about at the lowest level this year, which is the point that it has bounced from three times already.

4

For those willing to bet that the worst for oil is indeed over, and to ignore the siren call of analysts’ downgrades, Occidental is a play on improving sentiment in the energy sector. What’s more, the credit and option markets appear to agree, as both CDS and implied volatility are down 7% in the past month.

Short Interest movers: Gemalto, Electrolux, Vopak

Director Buys/Sells: ICAP, Reed Elsevier, Nokian Renkaat

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

Implied Volatility movers: KBC Group, Repsol, Electrolux

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 week

8

Significant fallers in past week 9

 

Director Dealings

Trades in the past week

STOCK

BUY / SELL

NUMBER OF DIRECTORS

DIRECTOR LEVEL

No. of DAYS AGO

IAP LN Buy 1 A 1
REL LN Buy 1 C 2
NRE1V FH Buy 1 A 2
ABBN VX Buy 1 A 2
EVK GY Buy 1 A 3
GPOR LN Buy 1 C 3
LXS GY Buy 1 C 3
ABI BB Buy 2 A/C 3/4
BPE IM Buy 2 A/C 3/5
ABG/P SM Buy 1 C 4
SY1 GY Buy 1 A 4
BAS GY Buy 1 A 4
RIO LN Buy 1 C 4
KNEBV FH Buy 1 A 4
III LN Buy 2 A/C 5
PMO LN Buy 1 A 5
SDRL NO Buy-Sell 1 H 2/4
ICA SS Buy-Sell 5 A/B/C 3/5
POP SM Buy-Sell 1 H 4/5
SCHP VX Sell 1 A 3
ULE LN Sell 1 B 3
BARC LN Sell 1 B 3
SKG ID Sell 1 B 3
ZOT SM Sell 1 A 3/4/5
CSGN VX Sell 1 A 4
SCH NO Sell 1 H 4
TIT IM Sell 1 C 4
DBK GY Sell 1 B 5
ERICB SS Sell 1 B 5
ELUXB SS Sell 1 1 5
NESN VX Sell 1 B 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 Friday…14

Three senior directors at BNP Paribas are under investigation for their dealing in the bank’s shares. While the early stage investigation implies no wrong doing, we can use OTAS to see whether the directors made unusual gains, or avoided sharp losses, as a result of these transactions.

Over the past eight years, two of the three directors have received very large sums in compensation through stock options and sold the majority of those exercised. While they may have been very good at accumulating shares, they have been very poor at timing disposals, which is a common feature of BNP board directors, with one notable exception. While determining the timing of a large fine from US authorities may have been even more difficult than timing sales of their own shares, we suspect that French investigators will struggle to show that even unusually large disposals were entered into with nefarious intent.

The trades in question took place in 2013, as the investigation covers the year before BNP received its $8.9bn fine for breaching US sanctions. None of the three directors in questions, Chairman Baudoin Prot, Honorary Chairman Michel Pebereau and COO Philippe Bordenave, has traded shares this year, when the only priority transactions have been by non Executive board member Marion Guillou, who also bought in 2013 along with CEO Jean-Laurent Bonnafe. The chart below shows priority director dealing by board members of all levels at BNP plotted against the share price.

1

Priority director dealing by all BNP Board Members, -2Y

In the six months following director dealings in the last two years, those buying have made a profit and those selling have made a notional loss, because the share price rose by a double digit percentage after the trades. If anyone was trying to avoid a loss to be triggered by an impending large US fine, they did a good job of disguising the fact.

The only profitable disposals were made by Non Executive Nicole Misson, whose trades are the last two red arrows on the chart above. However, with 174 shares to her name according to the 2013 annual report, Misson appears to want to hold only a minimal amount in the company.

Over the past eight years, more often than not the shares of BNP have fallen in the six months after director dealing, whether buying or selling. The exception is for buying by the second tier of executives, which are the only group who could be said to offer any insight into the direction of the share price. Bonnafe is a serial buyer of BNP shares and has a strong track record following his purchases, which predates his assuming the role of CEO in 2011. His share purchases in 2013 also performed well, but totaled only €36,570.

2  Share price performance in the 20 days and six months after dealing by BNP board directors.

This analysis in OTAS is for priority transactions, those where the director had control over the timing and thus may have been able to impart a directional signal to the market. The €2.46mm sale by Pebereau is by far the largest priority transaction in OTAS over this period. BNP shares fell 2.7% in the month after Pebereau’s sale, but rose 12% in the following six months. This is an unusually large discretionary sale for Pebereau, but one that is dwarfed by his non discretionary share dealings.

Since 2006, Pebereau has bought shares only once, a €180k purchase in February 2007, while exercising options worth €36,064,553 and subscribing for shares worth €376,000 in the 2009 rights issue. Total sales over the period, discretionary and otherwise, were worth €26,008,518. We would only classify €5,249,000 of this selling as priority, i.e. where timing was entirely at Pebereau’s discretion, with the balance being compensation or tax related, or sold at a predetermined time. The Honorary Chairman owned shares worth €8.7mm today according to the last annual report.

Prot is under investigation for eight sales totaling €9.25mm in 2013. We have a record of seven transactions totaling €6,093,671 and an exercise of employee stock options worth €7,307,153. While only two of the seven trades are classified as non discretionary, in value they account for 77% of the share sales. The BNP share price rose by a double digit amount in the six months after each and every sale. If the Chairman was signalling something to investors, it was that he does not know what his share price is going to do. Over the past eight years, Prot has bought €348,877 worth of BNP shares and sold shares worth €23,231,056. Over that period he has exercised options worth €20,727,990 and subscribed for €241,760 of shares. His holding of shares as per the 2013 accounts is worth €7.0mm today.

OTAS records show Philippe Bordenave exercising options worth €1,402,761 and selling €329,189 of shares, with no dealing considered priority. His holding is worth €2.4mm.

BNP is similar to other very large banks, in that executives receive significant sums in share based compensation and typically sell those shares when they may, in order to diversify their investments. More often than not there is no useful signal from the timing of their trades. Pebereau’s 2013 disposal was unusually large for a discretionary sale, which may have caught the eye of investigators, but it was not particularly well timed. The shares trade today at 1% below the price at the time of the sale. Prot has sold an average €2.9mm of shares in each of the past eight years and so the sale of €6.1mm in 2013 was also unusual. However, the bulk of the disposals by value are considered non discretionary and were made at prices a little below today’s level.

With General Mills announcing layoffs and lawsuits, and Americans becoming more health conscious, the packaged food giant has been struggling to generate the same revenue as in previous years.  Will General Mills right the ship, meaning plain sailing for investors, or will it struggle to find its footing, and see its share price stumble?

 

1

As a result of underperformance over the past 6 months, OTAS is flagging GIS as relatively undervalued. GIS trades at 17.6X 12M forward EPS, which is significantly below where it traditionally trades vs. the Food/Beverage& Tobacco sector, and is the lowest level vs. peers over the past year. Over the last 2 years, GIS has traded on average in line with the industry, but is currently at a 5 percent discount. 2

GIS is down 14% vs. the industry over the past 6 months. 3

EPS Momentum has deteriorated over the past month and is now -3.7%. This has resulted in trend forward earnings falling below the trend in stock price, making the shares vulnerable to further underperformance. 4

However, the price fall has led to a slow stochastic buy signal firing, based on past performance. Below the back tested information for GIS shows that this signal has worked 64% of the time, with an average gain when it is successful of 3.8% and a fall of 2.7% when it is not. 5

Short Interest movers: Electrolux, EasyJet, Seadrill

Director Buys/Sells: Schindler, Zardoya Otis, ABB

CDS spread movers: Accor, Natixis, Clariant

Implied Volatility movers: Siemens, Alstom, Swedish Match

Stocks trading unusually High Volume today

1

…and names in the news today… 2 3

…and finally those with High Volume traded Monday 4 5

6 most positively ranked stocks6

6 most negatively ranked stocks7Short Interest

Significant risers in past week8

Significant fallers in past week 9

Director Dealings

Trades in the past week

STOCK

BUY / SELL

NUMBER OF DIRECTORS

DIRECTOR LEVEL

No. of DAYS AGO

ABBN VX Buy 1 A 1
GPOR LN Buy 1 C 2
LXS GY Buy 1 C 2/5
ABG/P SM Buy 1 C 3
SY1 GY Buy 1 A 3
BAS GY Buy 1 A 3
RIO LN Buy 1 C 3
KNEBV FH Buy 1 A 3
III LN Buy 2 A/C 4
PMO LN Buy 1 A 4
BPE IM Buy 1 C 4/5
PMI IM Buy 1 C 5
RHM GY Buy 1 A 5
UBI IM Buy 1 A 5
ICA SS Buy-Sell 5 A/B/C 2/4
POP SM Buy-Sell 1 H 3/4/5
SDRL NO Buy-Sell 1 H 3/5
NESN VX Buy-Sell 2 B 4/5
SCHP VX Sell 1 A 2
ULE LN Sell 1 B 2
BARC LN Sell 1 B 2
SKG ID Sell 1 B 2
ZOT SM Sell 1 A 2/3/4
CSGN VX Sell 1 A 3
SCH NO Sell 1 H 3
TIT IM Sell 1 C 3
DBK GY Sell 1 B 4
ERICB SS Sell 1 B 4
ELUXB SS Sell 1 1 4/5
CNHI IM Sell 1 B 5
KNIN VX Sell 1 A 5
VOD LN Sell 1 B 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: Metro, OCI, Altice 

Director Buys/Sells: Barclays, Smurfit Kappa Group, Great Portland Estates

CDS spread movers: Rio Tinto, Hellenic Telecommunications, KBC Group

Implied Volatility movers: Telefonica, Nutreco, Sonova

Stocks trading unusually High Volume today1

…and names in the news today… 2 3

…and finally those with High Volume traded Monday 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

Trades in the past week

STOCK

BUY / SELL

NUMBER OF DIRECTORS

DIRECTOR LEVEL

No. of DAYS AGO

GPOR LN Buy 1 C 1
LXS GY Buy 1 C 1/4
SY1 GY Buy 1 A 2
BAS GY Buy 1 A 2
RIO LN Buy 1 C 2
KNEBV FH Buy 1 A 2/5
III LN Buy 2 A/C 3
PMO LN Buy 1 A 3
BPE IM

Buy

1

C

3/4

PMI IM Buy 1 C 4
RHM GY Buy 1 A 4
UBI IM

Buy

1

A

4

COLOB DC

Buy

1

C

5

EVK GY Buy 1 A 5
WEIR LN

Buy

1

B

5

TATE LN

Buy

1

B/C

5

DANKSE DC Buy 1 C 5
ICA SS Buy-Sell 3 A/B 1/3
POP SM

Buy-Sell

1

H

2/3/4/5
SDRL NO

Buy-Sell

1

H

2/4
NESN VX

Buy-Sell

2

B

3/4
VOD LN

Buy-Sell

2

A/B

4/5

BARC LN Sell 1 B 1
SKG ID Sell 1 B 1
CSGN VX Sell 1 A 2
SCH NO Sell 1 H 2
TIT IM Sell 1 C 2
DBK GY Sell 1 B 3
ERICB SS Sell 1 B 3
CNHI IM

Sell

1

B

4

KNIN VX Sell 1 A 4
ELUXB SS

Sell

1

B

3/4

IBE SM Sell 1 B 5
ARM LN

Sell

1

B

5

FHZN SW Sell 1 A 5
MHG NO

Sell

2

B

5

HL/ LN

Sell

1

B

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 Wednesday…14

Implied correlation on the S&P 500 reached the lowest level since March 2007 yesterday. This measure tracks the likelihood of similar short term moves in the 50 largest S&P stocks, or the type of activity that would occur if a macro or external event were to cause share prices to rise or fall together. The current low level reflects a degree of confidence among investors that there are no major concerns to cloud the outlook into the New Year and supports our interpretation of the average implied volatility of nearly 350 S&P 500 constituents from OTAS.

The reading comes as the 12 months forward P/E valuation of the S&P 500 hits the 17x that has been the peak level four times already this year. This is the highest level on the index since July 2007.1

Current expectations for EPS growth in 2015 are around 8%. EPS Momentum, a measure of the change in estimates, is -0.3% over the past month. Together this means that while downgrades have an impact on the valuation of the index, they are of insufficient size to stop the Earnings element of the P/E metric rising. Hence the S&P 500 could conceivably continue to make a series of new highs while maintaining its valuation around the 17x level.

Alternatively of course, as we have suggested before, a continued rally in the dollar could see strong demand for US assets push the index multiple through the current ceiling. The reasons for this would most likely be the continued outperformance of US economic growth compared with much of the rest of the world, and balance sheet expansion by central banks around the world other than the Federal Reserve.

The S&P is trading at a 16% premium to the European STOXX 600. This is the average premium over the past 8½ years, but the highest level since early December 2012. Despite greater volatility in the S&P, the two indices performed in line over the course of that month.

2

At the moment, average stock implied volatility on the S&P is marginally below that of the STOXX, even as volatility at the index level (STOXX 50) is 37% above that on the S&P. This indicates that over the next three months option investors expect European and US stocks, on average, to perform in a similar   fashion.                                                   3

 

The long run average of this ratio is 1, or parity.

At the stock level, implied volatility is highest in the US for Gamestop, Genworth Financial, Transocean, Safeway and Nabors Industries. The trading ranges for these stocks are all expected to be +/-23% or more by mid February. The trading ranges of Banca Monte dei Paschi and Fugro in Europe are  both expected to be wider than any US name, while other high volatility stocks in Europe include Banco Popolare, Petroleum Geo Services and Air France-KLM.

This shows that while energy prices are the source of common macro uncertainty, and takeovers always impact implied volatility, the big difference between Europe and US is the open wound in European banking that is still to be cauterized.

 

Short Interest movers: Vopak, Aggreko, Serco

Director Buys/Sells: BASF, Rio Tinto, Credit Suisse, Telecom Italia

CDS spread movers: HeidelbergCement, Renault, Marks and Spencer

Implied Volatility movers: SBM Offshore, Merck KGA, Technip

Stocks trading unusually High Volume today1

…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

Trades in the past week

STOCK

BUY / SELL

NUMBER OF DIRECTORS

DIRECTOR LEVEL

No. of DAYS AGO

BAS GY Buy 1 A 1
RIO LN Buy 1 C 1
III LN Buy 2 A/C 2
PMO LN Buy 1 A 2
BPE IM

Buy

1

C

2/3

SDRL NO Buy 1 H 3
PMI IM Buy 1 C 3
RHM GY Buy 1 A 3
UBI IM

Buy

1

A

3

COLOB DC

Buy

1

C

4

EVK GY Buy 1 A 4
WEIR LN

Buy

1

B

4

TATE LN

Buy

1

B/C

4

DANKSE DC Buy 1 C 4
KNEBV FH Buy 1 A 4
OMV AV

Buy

2

A

5

DIA SM

Buy

1

A

5

RATOB SS

Buy

1

C

5

ETE GA

Buy

1

A

5

HELN SW

Buy

1

C

5

POP SM

Buy

1

H

5

VOD LN

Buy-Sell

2

A/B

3/4

ICA SS Buy-Sell 2 A/B 2
CSGN VX Sell 1 A 1
SCH NO Sell 1 H 1
TIT IM Sell 1 C 1
DBK GY Sell 1 B 2
ERICB SS Sell 1 B 2
NESN VX Sell 1 B 2
CNHI IM

Sell

1

B

3

KNIN VX Sell 1 A 3
ELUXB SS

Sell

1

B

2/3

EDEN FP Sell 1 A 4
ARM LN

Sell

1

B

4

FHZN SW Sell 1 A 4
MHG NO

Sell

2

B

4/5

HL/ LN

Sell

1

B

4

BATS LN

Sell

1

A

5

HIK LN

Sell

1

A

5

SKAB SS

Sell

1

B

5

SREN VX

Sell

1

A

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 Tuesday…14