All posts by Tom Doris

Oil has been down sharply over the past 3 months and is consistently hitting new lows. This has wreaked havoc on the energy sector, but has created some interesting buying opportunities. The price of oil collapsing has caused people to rethink if Tesla is a viable option for the future or if this is a short term blip on the radar. The world spent 700 billion dollars exploring for oil last year, the most ever! However only a 4 1/2 month supply was created. Clearly the world will need to eventually move to an alternative energy source.  If you believe Oil prices are the reason Tesla has decreased in share price, then now could be a great time to look at the stock.


Tesla vs. United Stated Oil Fund

Over the past 3 months Oil and Tesla have both fallen apart. Tesla is down 25.4% on an absolute level, and down 5.5% vs. the industry. During this same time period the United States Oil Fund is down -32.1%.


If we look at the 6 month price chart of TESLA, we see that the stock has erased its gains over that time period.


EPS Momentum

EPS is in the bottom 10% of its regional industry however, it has been slightly raised over the past month to -5%. Given the fact that oil prices have been so depressed, analysts are worried about the demand for electric cars, as well as how easy it is to sell cars directly to consumers.


Tesla is now technically oversold and a backtested Bollinger Band buy signal has fired on the shares. Typically Tesla rises 62% percent of the time in the 20 trading days after breaching the lower Bollinger Band, with an average return of 14% when successful. This creates a buying opportunity for a stock that has been sold off aggressively. If you still believe in electric transportation, now could be the time to increase position size.


With Oil having hit a 5 year low, for the first time in a decade Exxon is no longer one of the two largest stocks in the US. OTAS guides us to whether this is a warning or an opportunity.


As a result of the out performance of the Energy sector as the oil price fell, which is a result of the secure cash flow that Exxon generates compared to peers, OTAS is flagging XOM as relatively overvalued. XOM trades 6.28X 12M Fwd EV/EBITDA, which is significantly above where it traditionally trades vs. the energy sector, and the valuation is currently at historically high levels. Over the past 2 years XOM US has traded at a 20% discount to the industry reflecting slower growth prospects, but it is currently trading in line.


XOM is up 8.74% vs. the industry over the past 6 months. However XOM is down 6.21% on an absolute basis over this time period.


EPS Momentum has improved in the past month, but remains negative at -2.9%. Given the diverse and cheap sources of hydrocarbons at Exxon’s disposal, XOM is in the top 40% of the regional industry for EPS Momentum.


XOM’s price fall has triggered a slow stochastic buy signal. This completes a full set of stochastic buy signals that have fired in the last five days, and a Bollinger Band buy signal, all of which backtest effectively. If we look at the backtested results of the latest signal we see that it has fired six times already this year and Exxon rose in the 20 days following every occurrence. However, it underperformed the industry on two thirds of these occasions.

XOM may no longer be the largest US stock, but it remains the bellwether of the US energy industry. As such it tends to outperform during periods of sharply falling oil prices and underperform when things are improving. The combination of technical and fundamental valuation signals may be telling us that Exxon has entered an underperforming phase.


Looking at the retail sector, we have seen some extreme underperformers over the past month, none as sharp as retail giant KSS US. After outperforming the market over the past 3 months, KSS US has erased most of its gains, heading into the pivotal holiday season. Interesting to note that over the past 3 months We have seen analysts consistently taking numbers down. What will be in store for next month?


If we look at the price chart over the past month, we see the that the market is up slightly, however KSS US has underperformed dramatically


Investors have taken note as the short interest on KSS US has reached extremely elevated levels. Currently the short % of free float share on loan is 16.25%, while the days to cover is 9.26.  Over the past 6 months we have seen the short interest increase; KSS US has now reached historical highs over the past month.


According to a recently conducted report by EY, 69 UK companies issued profit warnings in Q3 this year. That is the highest quarterly figure since 2008 and offers a wake up call to the perhaps overly ambitious (or in some cases, dishonest) executives that have overestimated the strength of Britain’s economic recovery. After the market sell off a couple of weeks ago, many share prices have begun the road to normality – however does this apply to those stocks still licking their wounds from below forecast earnings? What does the Christmas period have in store for some of these names?

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From a top down perspective, there are no real surprises considering the stocks in question: low valuation, high short interest and negative EPS momentum. Implied volatility (limited coverage) has started to retreat from recent highs, as has CDS however both appear to be trading at the upper ends of their 1 year ranges.

By digging deeper though, we can uncover those stocks that have seen the most pronounced reductions in a variety of risk indicators including short interest and by doing so narrow down the list of stocks that may be beginning the road to recovery as we approach the Christmas season.

TATE LN gave its second profit warning of the year in September and fell 18% in the process. Now though, the stock is starting to show small signs of life.

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We can see that EPS estimates remain negative, however analysts no doubt continue to readjust their estimates following recent turbulence. Directors have started buying stock, and short interest has come down by nearly 20% over the past week. CDS has also moderated slightly, however continues to trade above 1 year averages. With earnings in 9 days time, a small surprise could yield a significant recovery in the short term performance of the stock.

ASC LN has also had its fair share of bad news this year with profit warnings, warehouse fires and an unseasonably warm autumn. However, following a 65% drop in its share price since January, there are some small signs of hope for the distressed web retailer.

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Earnings 7 days ago resulted in a modest recovery with the stock up nearly 10% over the course of last week. 2 directors. including the newly appointed COO, bought stock immediately after the earnings release and short interest has come down by 4% over the past week. The stock continues to trade at a whopping 45x earnings, although such a valuation is actually well below its average rating against the market and the sector. EPS estimates have been increased by 1% over the past week and analysts could yet increase their estimates in the coming weeks as the stock introduces new management in the lead up to Christmas.

In addition to those stocks in the recovery ward, there are a few who remain on the operating table.

HL/ LN has seen its short base rise by 14% over the past week, despite share price performance being positive (+3%) and a technical buy signal firing on Friday’s close. EPS momentum is highly divergent to 1 month price performance as well as the mentioned increase in short interest.

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Finally, there seems to be little light at the end of the tunnel for TSCO LN – EPS Momentum continues to lie in the bottom 10% of the sector and CDS has blown out significantly over the past 5 days to its highest ever level. Price targets continue to be cut and the stock is trading at a 1 standard deviation premium to where it normally trades against the wider sector. The stock goes ex dividend in 2 days time and is offering a below par dividend yield of 3.4%.

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According to the FT, hedge funds are on course to have their worst year since 2011. Unexpected interest rate falls and failed M&A deals are just two of the stumbling blocks that money managers have had to deal with in recent months, and with markets currently in free fall, the immediate future offers little respite. Over the past month, the S&P 500 is down 7%, while the STOXX 600 has fallen 8.5%….it would appear the bulls have officially left the building.

Despite the mass sell off, there are some beacons of light within the melee of world stock markets. Interestingly, the stocks that have gone against the grain are those that have more recently had to endure exceptional levels of short interest. Why is this? There are two likely explanations. The first is that hedge funds have been forced to cover shorts aggressively for risk management purposes. In selling large chunks of the long book, they must also reduce the size of short holdings and hence cover large amounts of stock. Consequently, the most shorted names have seen the largest short term increases in their share prices – especially in the US.

Below we highlight names in the Russell 1000 that have more than 30% of their free float shares on loan. Note how the majority saw positive performance yesterday, despite the nation wide sell off.

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The other, more contrarian explanation why these stocks have performed particularly well in such adverse conditions is that some hedge funds may believe the worst is over in these names and have covered aggressively as the market sold off. If we consider the 3 month performance of this same list of stocks, the results are clear – most have underperformed the market significantly. Walter Energy for example has seen a 67% drop in its share price, while the wider market rose by 6%. Yesterday the stock was up 11%.

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We can use the OTAS dashboard to examine which stocks have seen increasingly negative sentiment, despite the market’s already prominent readjustment over the past week. Here, we can see that AKS US, CLF US and AZO US have all underperformed the market significantly over the past 3 months but despite this, hedge funds continue to short these names implying the worst may be yet to come . BYI US and MCY US, two stocks that have performed strongly over the past 3 months, have also seen sizeable increases in their short interest over the past 5 days and could offer a suitable short replacement for hedge funds looking to rotate out of other names.

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Alternatively, we can also isolate those stocks that have seen significant covering over the past 5 days, despite the market continuing to fall. All three stocks were up yesterday, with EDMC up 31% off the back of earnings. Notice how CIEN US and EDMC US have significant Price/Short Interest divergence – could hedgefunds be a leading indicator to the medium term performance of these name or are they merely taking risk off their books?

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We have 21 Australian ‘materials’ stocks in OTAS that have market caps of > $1bn USD. Companies range from chemical manufacturers to raw commodity miners however it is the miners that we are more concerned with in this instance.

It has been well documented that stagnating growth in both China and Europe has forced the prices of raw commodities to drop substantially in recent months. Iron ore and crude oil, two proxies for growth forecasts, have seen their prices fall by 40% and 18% respectively since the start of the year and consequently margins have collapsed, which in turn has lowered the CAPEX of Asian miners. Australian listed miners such as Fortesque and BHP Billiton have seen their share prices fall sharply over the past 6 months, and if it wasn’t for recent M&A revelations, Rio Tinto would be trading around 2 year lows.

For all three stocks, OTAS paints a risky picture, with implied volatility well above average ranges when looking back over the past year for both BHP and FMG and RIO experiencing a 5% increase in perceived price risk over the past week.

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Note here how in all three stocks, the upside skew is <1 and the downside skew is >1 – suggesting that the options market continues to position itself for downward price moves over the next 3 months. This shift in risk sentiment is not unique to the three aforementioned names. Since September, option market investors have become more wary of the sector as a whole and as negativity increases implied volatility should also rise.

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The S&P/ASX 200 Materials Index has fallen by 11.56% over the past 3 months, its sharpest fall over this period since the start of 2013. What we can gauge from the options market is that, in all probability, investors are positioning themselves for a further 14.3% fall in share prices over the next 3 months, inferring the worst is yet to come.


Looking at the valuation chart, it’s clear that Australian names were due a correction back in September.

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Now however, it seems that many mining stocks have normalized, with analysts downgrading their EPS estimates heavily over the past 3 months.

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One indicator that is lagging behind both implied volatility and EPS momentum is short interest. Granted, the average level has increased by 55% over the past week, however the current level is still well below the highs seen in September last year.

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Perhaps hedgefunds have taken the option to short oil or iron ore outright, however there is certainly an opportunity to take advantage of the existing volatility within this sector. Could a sudden bout of short selling put more downward pressure on stocks in the near term?

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Dividend yields across the sector are now at 2 year highs, which could prompt entry from income fund investors once the macro economic news flow has stabilised. Dividend cover rates look stable, however if firms cannot afford to increase their CAPEX what hope is there for income investors to receive as healthier a yield as is presently available?

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If you play or watch any type of sport, you would do well not to spot a product made by either Adidas or Nike. Both companies have, for the past 20 or 30 years, dominated the world of sports manufacturing and continue to do so ever more aggressively. If you needed a real life example of the type of rivalry between the two brands, look no further than El Clasico: the annual fixture between Adidas laden Real Madrid and Barcelona, whose kit is of course stitched together by Nike.

Recently, Nike has been the more dominant of the two: with better marketing, increasing market share and consistent product innovation. The World Cup, a gauge of success for both these companies, was won comprehensively by Nike, with social media campaigns generating unparalleled levels of awareness  and the company sponsoring more nations than Adidas for the first time (despite Adidas being FIFA’s official kit supplier). The German brand has seen its share price fall by 37% YTD due to geopolitical tensions in Russia and a comprehensive rise in its cost of sales. Nike’s share price is up 14.4% YTD. One would certainly be entitled to call that a thrashing.

However, following Adidas’ 3rd profit warning in a year, things may be starting to turn. Earnings estimates have shyly turned positive over the past month, and the stock outperformed the market and the sector in September by 4% and 8% respectively. Herbert Hainer the CEO and CFO John Stalker have recently completed insider transactions, with both having exemplary track records for buying stock and in the shorter term, the stock has technical support via a Full Stochastic buy signal that has a win rate of 68% .

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On a more fundamental level, the firm is forecast to recover, albeit steadily, next year: with sales growth projected at 5.6% and net income rising by 17.4% YoY. Operating margin, which was cut from 8.5% / 9% to 6.5% / 7.0% in August, is forecast to be near on 10% as we approach the end of Q3 and it will be interesting to see whether the company has made such significant adjustments over the course of 4 months.

The firm has recently announced a share buyback equating to €1.5bn, a theme constant with other multinationals around the world, and this could also provide a short term boost to the share price.

Finally, last month, there were rumours circulating that activist hedgefund Third Point was eyeing Adidas as a potential target in order to encourage the business to spin off Reebok and Taylormade Golf- two areas where the company has failed to deliver in the past year. Such intervention may be welcome from investors, alongside a readjustment of the firms exposure to certain European markets. If this, alongside analyst expectation, is anything to go by, Adidas has potential to reverse a miserable 2014 and pull one back against its American counterparts.

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Adidas’ current financial position makes it the underdog to Nike, and looking at several OTAS stamps it is easy to see why.

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Price outperformance, technical support and front running EPS momentum all suggest that Nike is set to continue its current reign of form at the top of the sportswear league. Valuation may be a cause of concern, however looking back at past instances of overvaluation, the stocks performance has not been hindered in the medium term. Analysts have upgraded their price targets by 10.25% over the past month and short interest remains well within 2 year averages.

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At the moment Nike look like the champions of the market, however dismiss Adidas at your peril – they do have Lionel Messi on their side after all….