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All posts for the month January, 2015

First off, a quick quiz. Are these quotes about Amazon or professional wrestling?

“You have to grab your competition by the throat and you gotta squeeze the life out of your competition.”

“There has to be a business, and the business has to make sense, but that’s not why you do it. You do it because you have something meaningful that motivates you”

” ‘Exciting’ is a dull world to describe the  business”

“All businesses need to be young forever. If your customer base ages with you, you’re Woolworth’s”

“That is not innovative. That is old school.”

There has been a lot of focus on the rapid decline in Q1 EPS estimates for the S&P 500, which are down 3% year-to-date. This is a discontinuous series, where the estimate always jumps at the beginning of the year. While this does not invalidate the decline that we have seen, it serves as a reminder that the best way to view EPS Momentum is using a blended forward rate.

What the quarterly data does show is that the disconnect between companies beating expectations and the subsequent revision to earnings is growing wider, making ever more meaningless the analysis of the number of company beats. There is a great game going on out there, which everybody knows is rigged, but continues to watch for entertainment, or perhaps an absence of other things to do. A bit like the fans of WWE.

The game is simple and starts with companies guiding analysts lower during a quarter. Once this is done to sufficient a degree, the company is able to beat the new estimate, although at the same time issues a warning that things cannot continue to be so rosy. Take Amazon last night, which rallied hard in extended trading because it had turned a profit. At the same time it issued guidance that Q1 sales would be in a range entirely below the prevailing estimate of $23bn and that operating profit was likely to be a loss, although it might squeak a profit, but that this would be below last year’s Q1 number.

Amazon discovered a while back that there is little to lose in not making an acceptable return on equity. It was 2010 when it last delivered a return above the cost of capital, since when the shares have still beaten the market, although not the retailing industry.

image2015-1-30 9-37-26

Amazon excuses its impending Q1 loss by saying that this is due to stock based compensation charges, which are non cash. However, they are still expenses and dilute existing shareholders and so must be accounted. I know that champions of the stock, and there are a lot when you trade on 527x forward earnings, will say that this is an old complaint and about as useful as pointing out that Brock Lesnar may not be the best fighter in the world. However, the point of this post is not to add unnecessarily to the for and against debate about Amazon, but to highlight that analysing stock prices against the trend in forward earnings is the most valuable means of assessing sentiment and the likely response to news.

We started off using this analysis for stocks with stable growth, such as consumer staples businesses and other such defensive companies. The assumption was that it would not work for stocks where the earnings potential was not measurable, such as an oil wildcatter for example. Amazon is a retail wildcatter, forever pursuing an even bigger opportunity funded out of today’s cash flow (and $5.2bn of financing in 2014). Over the long run the steady progress of the share price bears little resemblance to the exultation and depression reflected in analysts’ estimates, but a funny thing has happened over the last year.

image2015-1-30 10-3-20

We used a similar chart to show that Apple needed to pull another rabbit out of the hat with its recent results in order to justify the run up in the share price. Apple duly did and both the price and the forward estimate have gone vertical.

image2015-1-30 10-5-14

The question for consideration is whether Amazon turning a temporary profit is a rabbit from the hat and OTAS clients will be able to track EPS Momentum closely over the next few days to see how analysts respond to yesterday’s numbers. Meanwhile the bears can point out that over the last year, Amazon has underperformed Home Depot, Lowe’s, Target, TJX, Netflix and Macy’s by between 22% and 66%, while probably generating more column inches than all of the rest of the retailing industry put together. So maybe generating a decent return matters after all.

Bulls of the stock can point out that while WWE may be even more popular than Amazon Prime, at least that is one share that Amazon outperformed.

image2015-1-30 10-11-9

Quiz answers

Wrestling – Vincent K McMahon

Amazon – Jeff Bezos

Wrestling – Alexander ‘Saint Alex’ Nderitu

Amazon – Jeff Bezos

Amazon – Dean Starkman, Columbia Journalism Review, writing about Amazon’s tax strategy

 

The forward valuation of the top 100 stocks in the UK is at the highest level since April 2007 and approaching extreme levels above the long term average valuation of 13x.

image2015-1-29 8-41-55

The average valuation of 15.9x 12 months forward consensus EPS estimates is 1.2 PE points higher than the next 250 largest stocks, which are trading at the top end of the long term average valuation range, but not at exceptional levels. EPS Momentum is negative across both indices, albeit slightly better for the smaller stocks, which indicates that large cap stocks have been disproportionate beneficiaries of loose monetary policies aimed at boosting the value of real assets such as equities.

We are now entering a period where the UK is not supported by additional monetary injections, while the Eurozone is set to be. Stripping the UK stocks from the STOXX 600 we see that UK shares and European counterparts have a near identical forward PE, which is in the mid range of the long term ratio between the valuation of the two sets of shares. This indicates that investors expect average earnings growth to be similar across both markets.

image2015-1-29 8-49-42

The ratio of relative valuation has moved in the UK’s favour of late because of the poor performance year-to-date of Swiss and Greek stocks in particular. Comparing the STOXX 50 largest Eurozone stocks with the UK’s biggest firms, we see the European shares trading at a discount of an average 7%, which is a level around which this ratio has remained since November 2013.

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The last time European stocks broke through the valuation barrier to trade at parity with UK names was early summer 2014, but this was short lived. We turn to the option market to see whether investors there expect Eurozone stocks to outperform UK counterparts.

image2015-1-29 8-56-0

Here we find that implied volatility on the average Eurozone large cap is slightly below that of the UK equivalent (option market coverage is better for the largest cap names within the top 100). This means that option investors expect UK shares to be more volatile than Eurozone counterparts, meaning that they outperform when markets rise and underperform when they fall. The UK’s most volatile stocks are expected to be Anglo American, Glencore, Sainsbury, Rio Tinto, ARM Holdings and Barclays. The European equivalents are UniCredit, Intesa Sanpaolo, Societe Generale, Carrefour, ING and Schneider Electric.

The conclusion from this is either that European investors remain sceptical of the ECB delivering QE and have adopted a wait and see approach to continental shares, or that the UK’s exposure to more volatile sectors such as mining and energy, as well as the peculiar travails of the domestic food retailing industry, mean that it is inherently more volatile than Europe because global commodity trends trump Eurozone QE.

There is of course another possible conclusion, which is that as the ECB is the last of the large central banks to adopt QE then the final monetary backstop for equity prices has been revealed and there will be no more supportive interventions. This would paint a far more gloomy picture for equities everywhere, and one which is foretold in the valuation of stocks, but not in the markets for three month options.

image2015-1-29 9-11-50

Raiffeisen shares are currently up +12% in reaction to this morning’s announcement, on its business update call, that stated there is currently no ‘capital increase planned.’ The OTAS Stamps (below) indicate there were significant concerns ahead of this release, with the under performance of the shares mirroring concerns in the Credit markets (CDS +37% in the last week), and positioning by way of increasing Short Interest (+10% in the last week).

image2015-1-29 14-24-44

Positional bets have been steadily increasing from early December 2014. The current percentage of free float on loan stands at 20.3%….equating to20 days to cover. If investors now assume the worst is behind Raiffeisen the squeeze may well continue.

image2015-1-29 14-26-18

Similar such risks may exist for other shares as we head into Earnings season. These can be managed by using the Earnings Positioning screen on OTAS. This view allows you to quickly identify, among other factors, those shares that are heavily borrowed and have significant short squeeze risk (Days to Cover).

For example, if we filter the Stoxx 600 by companies reporting next week via the Events column and then rank by Days to Cover (by clicking the column header once), we can see that Talk Talk, TGS-Nopec Geophysical, Ocado, Daily Mail, Nokian Renkaat and Hargreaves Lansdown all have short squeeze potential with over 10 days volume to cover.

If you hover over the events column, and click the little icon, you will see the options below.

image2015-1-29 14-27-47

image2015-1-29 14-28-35

Utilising other analytics in the Earnings Positioning View and the OTAS Stamps allows better management of a Portfolio, by helping identify factors that could affect the share price performance, such as earnings expectations, current market sentiment, technical state and investor positioning.

As QE and Greek elections pile pressure on Europe’s currency, are dollar earners the place for investors to hide out? While Syriza wants to keep Greece in the Euro and at the same time to renege on the country’s debts, how this plays out in Italy is at the forefront of people’s minds. If the new Greek government were to get its way, then Italians might start agitating for a similar deal, while if the Greeks didn’t and were expelled from the single currency, the prospect of a similar option for other countries would surely be raised. The Euro touched a more than 11 year low after the announcement of the Greek result, but is up a fraction at pixel time.

Meanwhile we are monitoring a list of 286 European based companies where revenues are more than 30% from the Americas. We have looked at these using our newly created Risk View, which is available for sharing with clients of OTAS. This view is a streamlined version of the Dashboard and focuses on the most significant OTAS factor analysis.

Around one quarter of these companies have a sufficiently liquid option market for us to provide implied volatility analysis. Option investors predict an average move of +/- 12½%  for these stocks in three months’ time, which is down from the recent peak reached on January 16 and well within the average range over the past five years. This move is almost exactly in line with the average expectation for the STOXX 600 and only 1.5 volatility points higher than the median of the S&P 500.

image2015-1-26 9-30-32

The average CDS level of 52bps is flagging as below the normal one year range and is at the lowest level since January 2008. Short interest is also within the usual range, while the average valuation, which is typically a modest premium to the European average, is at a one year relative low.

The OTAS positive filter ranks shares in a watchlist or portfolio based on the strength and uniqueness of the signals, so that a company with a green flag that is not being raised against other shares is more likely to appear at the top of the list. On this measure, the top placed stocks from our dollar earners are Aegon, Portugal Telecom and Sonova.

image2015-1-26 9-41-24 (1)

Among the negatively ranked shares are Siemens, Ericsson and Givaudan. Ericsson in particular caught the eye as it has one of the only two backtested negative technical signals to fire across the list of 286 stocks and this combines with a relatively high valuation flag and comes the day before its earnings release. We normally search OTAS for stocks with attractive relative valuations and positive technical signals, cheap with a catalyst if you like*, but this is an example from the other end of the valuation spectrum.

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Overall, there are possibly too many companies with a third or more of revenues coming from the Americas to expect a clear differentiation from the broader market and this is certainly supported by the relative implied volatility and valuation of the average stock on our list. However, within the list there are a wide range of stocks with both positive and negative market read and the OTAS Risk View, combined with our positive and negative ranking, is a rapid way to find these names.

*Relatively low valuation and positive EPS Momentum provides a similar, but purely fundamental cheap with a catalyst screen

I just read an email from option trading adviser Steve Place, in which he detailed his reasons for expecting volatility in Apple to rise. Steve deals in derivatives and hence does not care whether Apple breaks above or below its recent range, but only that it does one or the other. OTAS shows that three month implied volatility is almost on a par with the broader technology industry, which is rare, and has been testing the upper limits of the two year range.

image2015-1-26 13-32-30

Apple reports earnings tomorrow and ahead of results EPS Momentum is positive and in the 79th percentile of the sector, i.e. relatively strong but not remarkably so. The valuation of 6.75x EV/EBITDA may be at a discount to the sector, but is at the highest point for two years and outside of the normal range over that period.

image2015-1-26 13-32-58

Steve argues that Apple is like gold in that it is a store of liquidity for investors who want to hold something other than cash, but who may not have a high conviction about the fundamental merits of the security. If this is true in the long run, we might expect Apple to trade independently of its earnings projections. Here is the relationship between the shares and the 12 months’ forward consensus earnings estimate over the last five years.

image2015-1-26 13-32-8

That’s not a bad alignment, although the share price swings about far more than the estimates. The relationship hints that Apple is a little toppy relative to the trend in expected earnings ahead of tomorrow’s release. Maybe that’s okay because the company is about to pull another of its rabbits out of the hat, or maybe it’s because investors have parked cash in the name as uncertainty grows elsewhere. Either way, with a section of the investment community potentially snowed in and not responding, tomorrow’s results may provide the ideal opportunity for some increased volatility in Apple shares.

Short Interest movers: Neste Oil, Mitie, Antofagasta, Kone

Director Buys/Sells: OPAP, Whitbread, Kingfisher, Unilever

CDS spread movers: Adecco, RWE, Vinci, Valeo

Implied Volatility movers: Swatch, Baloise, Georg Fischer, Boliden

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 stocks
6

6 most negatively ranked stocks7

Short Interest

Significant risers in past week*
8

Significant fallers in past week*
9

*D next to flag denotes dividend

Director Dealings

Recently Reported Priority Trades

Stock

Buy / Sell

Director Job Titles

Day Reported

Backtested return
OPAP GA Buy Non-Executive Vice Chairman Thursday 22nd (Jan) Excellent 20D return, Untested 6M return
CAST SS Buy CEO of Subsidiary Thursday 22nd (Jan) Good 20D return, Good 6M return
WTB LN Buy Non-Executive Director Thursday 22nd (Jan) Poor 20D return, Good 6M return
KGF LN Buy Executive Director Thursday 22nd (Jan) N/A (untested)
UNA NA Sell HR Director Thursday 22nd (Jan) Poor 20D return, Poor 6M return

CDS

Significant risers in past week10

Significant fallers in past week11

Implied Volatility

Significant risers in past week

12
Significant fallers in past week
13

What to watch for on Monday…

14

Short Interest movers: EMS-Chemie, AXA

Director Buys/Sells: Lonza Group

CDS spread movers: Fresenius, Carrefour, ThyssenKrupp, Aegon

Implied Volatility movers: Julius Bar, RWE, Societe Generale, Total

Stocks trading unusually High Volume today
image2015-1-22 8-54-32

…and names in the news today…

image2015-1-22 8-31-50

image2015-1-22 8-32-33

…and finally those with High Volume traded yesterday  

image2015-1-22 8-27-54

image2015-1-22 8-28-35

6 most positively ranked stocks
image2015-1-22 8-25-59

6 most negatively ranked stocks

image2015-1-22 8-26-38

Short Interest

Significant risers in past week*
image2015-1-22 8-8-6

Significant fallers in past week*
image2015-1-22 8-7-32

*D next to flag denotes dividend

Director Dealings

Recently Reported Priority Trades

Stock
Buy / Sell
Director Job Titles
Day Reported
Backtested return
LONN VX
Buy
Executive Director / Committee
Wednesday 21st (Jan)
Good 20D return, Good 6M return

CDS

Significant risers in past week

image2015-1-22 8-24-41

Significant fallers in past week

image2015-1-22 8-23-13

Implied Volatility

Significant risers in past week

image2015-1-22 8-13-8
Significant fallers in past week
image2015-1-22 8-12-29

What to watch for on Friday…

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Here at OTAS, we have been working on ways to analyse stocks ahead of earnings and sales releases. While we do not make any forecasts about whether a company will surprise investors or not, we are able to gauge how surprised investors are likely to be by a strong set of numbers, or equally by a poor performance. Even when there are no specific flags firing for a name, OTAS is still able to guide you to the amount of optimism already in a stock price.

To illustrate this, we have filtered the top 100 UK shares for those with sales and earnings releases next week. To do this you should left click the filter icon in the top right of the Events column header. If you are unsure, you may always click the “?” icon in the top right of your screen for assistance on how to use OTAS.

We then choose to see the stocks reporting next week in the Earnings Positioning View available in the latest version of OTAS. Do let us know if you would like this to be shared with you. This view is our assessment of the need to know signals ahead of an earnings event, although the Manage Views function allows you to create a bespoke view all of your own.

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The RSI is the simplest and best understood measure of overbought or oversold. Traditionally a reading of above 70 indicates overbought and below 30 means oversold. The index is a measure of the number of times a stock closes up relative to closing down and the theory is that the more frequently it closes up, the stronger the likelihood that good news is priced into the stock.

From our list above, British Land is trading above 70. A look at the Signals page for the shares shows that this is very close to the peak level for the stock over the past year.

image2015-1-22 9-12-34

The Earnings Positioning View also shows that the shares are yielding less than normal relative to peers and there was insider selling three days ago. The most senior, or level A, directors at British Land have called their stock well over the past eight years, with the shares declining on average nearly 10% in the six months after senior insider selling.

image2015-1-22 9-16-41

There are no flags for short interest or implied volatility for any of the stocks reporting next week, which suggests no extremes of short term positioning ahead of releases. The days-to-cover column shows the number of trading days required to close out all short interest and, if a high number, indicates the potential for a short squeeze on a well received set of numbers.

There are no flags for Diageo, BT and 3i, which are all reporting next week. However, we may use the EPS Momentum screen for these shares to gauge how investors are positioned in the names. We do this by isolating the 12 months forward consensus EPS estimate on the Individual Stock chart, which is plotted against the share price. While Diageo has run ahead of its two year earnings trend since mid October last year, the long term relationship between earnings and stock price indicates that investors may simply be catching up with estimates for the first time since December 2007. On this chart there is room for a 3.5% move to 2000p should Diageo deliver next Thursday.

image2015-1-22 9-26-1

BT meanwhile trades very much in line with its long term earnings trend, which while not ruling out a positive surprise and the stock trading above trend as it did briefly in February, may provide an indication of the limits to the upside in the name.

image2015-1-22 9-27-9

Readers are invited to check out the share price trend in 3i against forward earnings for themselves and to take a look at the British Land chart, which appears to offer fundamental support to the technical analysis. Please contact us if you are unsure how to find these EPS Momentum charts.

Short Interest movers: Clariant, Tullow Oil, Ladbrokes, Hunting 

Director Buys/Sells: BPE, British Land

CDS spread movers: Rio Tinto, Infineon, Glencore, Tesco

Implied Volatility movers: Swatch, Holcim, Shell, PSP Swiss Property

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 stocks
6

6 most negatively ranked stocks7

Short Interest

Significant risers in past week*
7

Significant fallers in past week*
9

*D next to flag denotes dividend

Director Dealings

Recently Reported Priority Trades

Stock
Buy / Sell
Director Job Titles
Day Reported
Backtested return
BPE IM
Sell
Non-Executive Vice Chairman
Monday 19th (Jan)
Excellent 20D return, Mixed 6M return
BLND LN
Sell
Executive Director
Monday 19th (Jan)
Average 20D return, Poor 6M return

CDS

Significant risers in past week10

Significant fallers in past week11

Implied Volatility

Significant risers in past week

12
Significant fallers in past week
13

What to watch for on Thursday…

14

Short Interest movers: Bayer, Catlin, Ingenico, Vopak

Director Buys/Sells: Richemont, Aberdeen, Schibsted, Geberit

CDS spread movers: Volkswagen, BMW, Erste Bank, Statoil

Implied Volatility movers: Zurich Insurance, Nestle, Sainsbury, ING

Stocks trading unusually High Volume today
image2015-1-20 8-50-52

…and names in the news today…

image2015-1-20 8-41-35

image2015-1-20 8-41-56

…and finally those with High Volume traded yesterday  

image2015-1-20 8-43-13

image2015-1-20 8-43-30

6 most positively ranked stocks
image2015-1-20 8-40-20

6 most negatively ranked stocks

image2015-1-20 8-41-9

Short Interest

Significant risers in past week*
image2015-1-20 8-23-36

Significant fallers in past week*
image2015-1-20 8-23-0

*D next to flag denotes dividend

Director Dealings

Recently Reported Priority Trades

STOCK

BUY / SELL

DIRECTOR JOB TITLES

Day Reported

Backtested return
CFR VX Buy Executive Director / Committee Friday 16th (Jan) Good 20D return, Good 6M return
ADN LN Buy Non-Executive Director Friday 16th (Jan) Poor 20D return, Good 6M return
UBI IM Buy Independent Director Friday 16th (Jan) Mixed 20D return, Mixed 6M return
SCH NO Sell Senior Vice President Monday 19th (Jan) N/A (untested)
GEBN VX Sell Executive Director / Committee Friday 16th (Jan) Poor 20D return, Poor 6M return
AMS SM Sell CEO Thursday 15th (Jan) Poor 20D return, Poor 6M return

CDS

Significant risers in past week

image2015-1-20 8-24-47

Significant fallers in past week

image2015-1-20 8-24-11

Implied Volatility

Significant risers in past week

image2015-1-20 8-19-43
Significant fallers in past week
image2015-1-20 8-20-20

What to watch for on Wednesday…

image2015-1-20 8-16-56