Archives

All posts for the month May, 2016

OTAS has been flagging some interesting Insiders transactions in the regional market lately. These transactions are valuable to investors as they show how the stocks could perform well in the long run, or the opposite.

LG Chem (051910 KS)

The demand of the Electronic Vehicle Batteries has been growing rapidly, and LG Chem is one of the names that is well positioned.

From the OTAS news, the battery size of the market is estimated to reach a market size of $17.26 billion by 2021.

http://www.4-traders.com/news/Battery-Market-Estimated-to-Reach-a-Market-Size-of-17-26-Billion-by-2021-Growing-Integration-of-E–22249255/

Looking at Graph 2 & 3 below, the share price of LG Chem has been corrected -18% from the peak in March. Since then, the Company management has been increasing stake for more than 16 times since April 2016.

Asia Large Cap (Graph 1)

1

LG Chem (Graph 2) – Green arrows represent the times of increasing stake

2

LG Chem (Graph 3)

3

On the other hand, OTAS flagged that the CEO and Independent Director of Commonwealth Bank of Australia (CBA AT) have been cutting stakes at A$77 levels. Market concern of the bank’s net margin shrinks as interest rate trend is declining, and worry about whether the bank can maintain its dividend pay-out. Would A$77 be a toppish level?

Article on Australian Banks a potentially catastrophic crisis

http://seekingalpha.com/article/3977693-australian-banks-thin-ice?source=feed_sector_financial

Commonwealth Bank of Australia  (Graph 4)

4

Commonwealth Bank of Australia  (Graph 5)

5

White Rabbit: Don’t just do something, stand there                                                – Walt Disney, “Alice in Wonderland” 1951

Kudos to Ben Hunt for this excellent piece on the role of narrative in markets, and for using better quotes than me. Anyone who can base insightful equity analysis around a quote from the Godfather deserves special mention.

Ben takes us all the way from his overarching explanation of what is behind market moves, right down to the nitty gritty, which in this instance means Salesforce.com. The image below shows the inexorable rise of analysts’ forecasts for the company’s earnings, even though Ben notes that he is “pretty sure that Salesforce.com has never had a single penny of GAAP earnings in its existence”. The chart also shows the large wobble that the shares had earlier in the year, although the doubters have since seen the error of their ways.

Salesforce.com Share Price and Estimates

In a simple but telling piece of analysis, Ben shows that in the last five years, owning Salesforce.com on only the 21 days after its earnings releases and the 43 days that the Fed made an announcement, returned 167%. Owning Salesforce.com on the other 1,208 trading days would have lost 8%. For a stock up 138% in that time, you could have been standing around doing nothing an awful lot and avoided losing money.

Ben also notes that CEO Marc Benioff, whose ebullient narrative drives the stock’s upward trajectory when the Fed Chairman is not doing this for him, uses 10b5-1 programs to sell shares in his company every day. These programs are predetermined sales and thus do not flag on the OTAS Insiders stamp, but you can see them by unticking the Priority Transactions box in your Core Summary app.

Daily Selling by Salesforce.com Insiders

In many ways Salesforce.com is typical of the handful of software companies that truly make it. Over time the company’s success returns cash flow and eventually earnings and the rating slowly normalises. While Salesforce.com is still 3.8x the average sector multiple, the steady de-rating appears to be well underway.

Salesforce.com Eroding Valuation

Reflecting on Ben’s analysis that you make money in short bursts and could spend most of your time doing nothing, I was struck by the similarity of this to the OTAS trading mantra, which may be expressed as SLOW DOWN AND DO NOTHING. Most of the time when trading you may leave your orders in an algo and do something else. Only in exceptional circumstances do you need to intervene to adjust an order and OTAS will fire an alert to tell you when that happens.

The results are in for the first quarter earnings season in the US and do not make for pretty reading. For the sixth consecutive season, operating earnings of the largest companies have declined. A little over one fifth of companies issued earnings guidance and, of those, 71% advised analysts to lower their expectations. The gradual erosion of the earnings base of the country’s largest companies has taken its toll on the valuation of the stock market.

US May 16

The valuation of the market peaked in May 2015, just over a year ago. There was a first quarter rally on the back of more monetary easing in Europe, but the impact on US companies is likely to be short lived. When the ECB announced that it would be buying European corporate debt, this boosted the value of debt and pushed down the yield that borrowers have to pay. Large US companies can take advantage of this to raise debt in Europe and use the proceeds to buy back shares to temporarily support stock prices.

The decline in earnings also has a short term impact on valuation, by raising the market multiple, but as the chart shows, the more powerful force is the growing momentum out of US equities in response to declining profitability.

There is some good news, however. OTAS makes it easy to filter a market or portfolio of stocks to find those where the trend in earnings is bucking the general malaise. There are 33 companies with falling share prices and rising EPS estimates, where this contrast is sufficiently significant to stand out from the rest of the market. Ten of these shares are in the energy and materials sectors, which are whipsawed by the anticipated moves in currency and commodity markets, but the remaining 23 shares are trading at a 22% discount to the average valuation of the broader market.

The US stocks bucking the earnings malaise

By applying one filter for stocks with significant divergence between falling price and rising EPS estimates, and a second excluding energy and materials shares, in just a handful of clicks we are left with a chart showing only the outliers across the whole market. Hovering over each yellow disc reveals the name and recent performance of the company. Frontier Communications is highlighted below.

Another look at the stocks bucking the negative trendDouble clicking the name takes you to the EPS Momentum page for Frontier Communications and to a chart that shows the relationship between the share price and estimates of upcoming earnings. In the case of Frontier, investors were faster than analysts to realise the downgrades that plagued the last nine months of 2015, but both analysts and investors have been in step since the beginning of this year. Then the share price weakness over the past month contrasts sharply with the average 8% upgrade to forward earnings posted by the analyst community.

Frontier Communications' Loss Estimates Fall

Obviously it is up to investors to decide whether the recent share price weakness heralds another false dawn for the company, but OTAS provides layers of analysis to help make this judgement. For example, Frontier’s estimates have risen for the years to December 2016 and 2018, but fallen for 2017, so it may be that investors are most focused on next year. Frontier’s borrowing costs over seven times that of its industry peers and the shares may thus have reacted to the renewed prospects for a summer rate hike. Frontier will also pay a dividend in 20 days times and has a forward yield of 8.6%, but while free cash flow covers the pay-out, earnings do not.

All of these factors influence the decision to buy or sell Frontier, or indeed any stock. OTAS provides a one-stop shop for all the market intelligence that you need to make sure that you are as fully informed in your trading or investment decision as you can be. OTAS also draws out the priority issues that are impacting share prices, to help fundamental investors frame the most pertinent and timely questions when they interrogate a company’s performance, its financials and its management.

The customisable dashboard view in OTAS allows users to analyse specific risk factors across a portfolio, index or sector by letting them choose what data or analyses they wish to see. The combination of multiple factor analysis creates a powerful tool and a potential early warning system on stock performance for investment professionals.

As an example, you may wish to identify which stocks are currently experiencing strong upgrade momentum but that also have meaningful short interest/short squeeze risk.

Lets consider the STOXX 600 currently:- The custom dashboard created below includes additional data on current technical RSI level, Short Interest change over 1 Week and Days to Cover.

Two simple filters within this view(positive EPS momentum and Days to Cover > 10) has identified six stocks which are currently exhibiting top *decile sell-side earnings revisions and carry high implied short squeeze risk.

Furthermore, four of the six stocks have seen a contraction of free float shares on loan in the last week whilst one(Altice) has also had a reliably back-tested technical Buy signal fire recently.

ss

Do such stocks exist in your investment universe ? Do these combined factors impact your thinking ?

 

Global uncertainties were injected into the market: overnight, the Federal Open Market Committee had revealed higher chance of rate hike in June while Brexit risk still remains. OTAS has highlighted the top ten days to cover for the Asia Large Cap names. Interestingly, nine out of  these ten equities are listed in Hong Kong, which resonates with the fact that Hong Kong’s recent shorts turnover has been the highest  since 1998.

Asia Large Cap Names

1

Prada (1913 HK) needs 61.57 days to cover, highest amongst the Asia Large Cap names. Overnight, its luxury brand peer Burberry’s share price had dropped by 2.7%, positing a second straight drop in annual earnings.

2

The Hong Kong jewellery and luxury goods sales was hit hard.  Chow Tai Fook Jewellery Group (1929 HK) short interest is higher than its peers as the company released two profits warning within a year.

3

HSBC (5 HK) had a significant increase on days to cover within a week – it had jumped to 18.4 days from 2.69 days just from one week. 2.7% of free float shares are on loan, which is high relative to the past two years and up by 567.4% in the past week.

4

Want Want China Holdings (151 HK) has 12.8% of free float shares on loan, which is very high relative to the past two years and highest amongst its peers as well.

5

6

The new addition of two third party analytics providers, Estimize and TIM Indicator to the Core Summary provides even greater granularity when assessing a company ahead of events such as earnings releases. We have proved in previous blogs the importance of having comprehensive multiple factor analysis available in the decision making process and the value that you can derive from having such tools when considering investment decisions. The ability to immediately analyse a broad range of market indicators is an important extension of a users own existing metrics and one which can help maximise investment performance.

Her are two examples of stocks that report after the close tomorrow exhibiting a number of outlying factors :-

Shake ShackEstimize forecasting a beat vs Wall St but sentiment remains negative….

ss

  • Large sector relative underperformer YTD(-18%,)  has found support in the last week, +1.43% vs peers. N.B – The increase in short interest in the last week would suggest this isn’t short covering.
  • Analysts average EPS forecasts remain sharply unchanged over the last month suggesting they are not expecting anything but an in-line earnings report.
  • Company insiders have been selling stock ahead of numbers. Our analysis indicates they have a proven track record of timing their sell transactions well historically.
  • Sentiment indicator short interest shows a 26% increase in the free float on loan in the past week, an insight into market positioning. Total free float on loan stands at over 8.5%.
  • Crowd-sourced Estimize consensus forecasts are 1 cent above Wall Street estimates at 0.07c. Historically, Shake Shack have beaten the Street’s EPS forecasts in 4 out of the 5 quarters since IPO.
    ss1
  • Contributors to the TIM alpha capture product are still very negative on Shake Shack shares with a high proportion of short vs long ideas(vs regional average.) This indicator has performed better on this stock than 95% of stocks in N.America.

NordstromCheap fundamental valuation but other risk indicators are heavily bearish…..

nord1

  • Nordstrom share price momentum has experienced meaningful underperformance(-4%) vs peers in the week preceding numbers and are down -3% relative YTD.
  • Sell side EPS estimates have seen a marginal downward revision in the last month and are flat MoM.
  • Current 12m Fwd P/E valuation of just under 15x is now looking cheap on an absolute and market/sector relative basis compared to the last 2 years.
  • The options market is still associating a high degree of share price risk in Nordstrom shares compared to peers, Implied Vol indicates a +/-17% range over the next 3 months. Additionally there was unusually high volume in options traded yesterday, over 70% of which were traded in Puts.
  • Short interest remains extremely elevated with over 18% of the free float shares on loan. The last week has seen a small contraction in this figure but suggests little in the way of significant positive re-positioning.
    nord1
  • Credit markets also remain particularly concerned with Nordstrom. The current spread of its CDS is now at its widest level since September 2009. At that time its shares were 35% lower.
  • Estimize estimates are inline with Wall St forecasts for Q1. Historically, Nordstrom have surpassed Estimize EPS consensus 53% of the time.
  • Trade ideas on Nordstrom continue to exhibit a heavily negative skew with a high distribution of sell vs buy opinions.

To add Estimize and TIM Investor analysis stamps please contact – sales@otastech.com

Aussie market has outperformed the region this week, AS51 closed at a 6 months high after a surprise rate cut by RBA at the beginning of the week. The banks were the main contributor to the index after strong result from MQG, ANZ and NAB. Furthermore, RBA cuts 2016 underlying inflation forecast which market anticipates as another rate cut soon. Perhaps it’s time to look at some Aussie stocks like Super Retail Group and Macquarie, both have indicated positive signal today.

Super Retail Group

Australia Retail sales +3.6% in March YoY. Super retail group has just delivered a strong sales update, yet its P/E is still below its industry average. Stock is also outperforming its peers in Asia.

4

1

2

Dividend yield of 5.1% is high relative to the sector over the past two years.

3

 

Macquarie Group

The company just delivered a solid result today and based on historical data, the stock has consistently outperformed after earning release.

5

6

7