As we move headlong into Q2 reporting season we again turn to the Earnings Positioning view in OTAS whereby we cut through all the noise and discuss those stocks which may be carrying unanticipated risks or conversely present a potential investment opportunity which the broader market may be overlooking. Here, our focus is on the companies in the FTSE 350 which report Sales or Earnings next week.
Of the 35 companies which report next week, Fresnillo shares are one of only 4 who’s current share price condition is in a technically oversold state on a standard RSI measure. Performance year to date has been nothing less than horrific with the shares down -19% in absolute terms whilst under-performing the broader Basic Resources sector by around -10%, however, looking at recent price returns that relative bet may be unwinding with the shares finding some positive momentum, outperforming peers by +3.5% in the last week alone.
With just under 15% of shares currently on loan, short interest remains at extremely inflated levels and has seen little signs of contraction suggesting Hedge Funds are happy to run positions in Fresnillo into numbers so perhaps it is value funds, who may now be focussing on it’s inexpensive valuation and considerable contraction in implied volatility levels, that are re-adjusting sector weightings helping contribute relative support for the shares.
Other factors such as earnings expectations continue to be revised downwards putting them in the bottom quartile of the sector for downgrades over the last month. Analysts forecast 12m fwd EPS estimates have been cut by just under -7% whilst seemingly the adjusted market price has more than reflected this, -13% in absolute terms over the same period. The shares remain a consensus ‘Buy’ rating currently offering a 28% discount to the median analyst price target.
If the company manage to meet (or beat) current guidance there is the risk of a relief rally from these levels which could be exacerbated by Hedge Funds. With over 15 days trading volume to cover the entire short base, negative directional plays should also consider the short squeeze risk of such an event. Earnings Tuesday 4th August
Fresnillo: Price vs Short Interest
Another Company which heads into its Sales release on the back of less that spectacular performance is Enterprise Inns.
With investors continuing to shun the beleaguered pub sector following proposed structural Government reforms at the end of last year the shares have returned just +2.4% year to date and have underperformed the wider European Travel & Leisure sector by c-14%. Screening the stock on the Earnings Positioning view some interesting elements are observed.
Similarly to Fresnillo above, technically the shares are now oversold on the RSI measure and are also within touching distance of the 200dma, potential support indicators for traditional chartists.
From a fundamental perspective analyst forecasts have remained largely unchanged in the last month, seeing just 40bp downward revisions to estimates. The price action over this period (-10%) suggests the market is anticipating a far worse earnings scenario this time around.
Such concerns are clearly not being expressed by management however. Just last week Chairman Robert Walker purchased 160,000 shares in the company, only his second purchase to date with the shares rallying +12% the following month post his previous transaction. Our rating system shows he is the most reliable of all directors at Enterprise when considering their historic back-tested performance.
Investor positioning continues to show a heavily negative bent with short interest (depicted by % of free float on loan) standing at around 2.7%, the highest level for over 8 years equating to a not insignificant 14 days to cover. The question is how much is already in the price and who do you back from here…the street or the Company Chairman !? Sales Release Thursday 6th August
Chairman Robert Walker’s backtested performance and ranking
Direct Line shares have continued to attract investor attention due to the current favourable pricing environment in car insurance premiums and its aggressive dividend policy (DLG group current 12m fwd yields is 8%,) however the Earnings Positioning view highlights some potentially negative risk indicators are forming ahead of its earnings release next week.
Performance-wise Direct Line has blown its closest competitors out of the water this year, generating returns in excess of 20% versus the sector and closest peers with 1 week price action showing little signs of slowing. However, it is the more fundamental factors which are flagging that could interpret signs of stress.
Over the last month 12m fwd earnings estimates have been revised down by a shade under 3% which puts them amongst the bottom 5% of negative performers in the industry group, yet despite this the shares have rallied 12% over the same period. This relationship between price and EPS has become the most statistically diverged across the entire European Insurance sector. As a result of the strong share price performance the current 12 Fwd P/E valuation of 12.6x is at its peak multiple on an absolute basis at 2 year highs relative to the sector.
Hedge Funds seem reticent to bet against Direct Line given that Short Interest in the name is minimal, however Long holders who have been in the stock for its income and capital appreciation may now choose to re-assess the shares ahead of earnings. Earnings Tuesday 4th August
Direct Line – Price vs 12m Fwd EPS ests (1 yr view)
Dont forget, similar such screening can easily be conducted across your own Portfolio or stock watchlist.
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