By Martin Tillier
As regular readers will be aware, I’m not an American, but I live here now and when it comes to holidays I take every one given to me.Thanksgiving has particular appeal. Let’s face it, any holiday that centers around watching sports on TV and drinking and eating too much can’t be all bad.
I decided, then, to write a Thanksgiving themed piece. There is much to give thanks for in a year that has seen record highs in equity markets, but I thought I would focus on some turkeys. It’s not just that I am a grumpy old man. It’s also that in a buoyant market, stocks which have had a tough time are, to my trader’s mind, more interesting.
There are three high profile companies whose stocks have more closely resembled a turkey than the high flying bird that is the norm for the market so far this year.
Even in buoyant markets, I have written negatively elsewhere on the prospects of all three. For various reasons and in varying ways, Apple (AAPL), Tesla Motors (TSLA) and JC Penney (JCP) have all seen problems with their stock price this year.
AAPL’s problems didn’t start this year, as you can see from this 16 month chart, but +2% in a year when the S&P 500 has gained over 26% is still some pretty serious underperformance.
I had, back in 2012, predicted that the stock was topping out when it was trading at around $670; not a bad call, though I say so myself. My reasons at the time had nothing to do with the quality of Apple products, nor the success of the company. It was simply that expectations were getting out of hand, with analysts falling over themselves to issue ever higher earnings forecasts and price targets. AAPL became a victim of its own success.
The deleveraging process has taken some time, as these things do, but if the evidence of the last few weeks is to be believed, it is coming to an end. For anybody who believes in fundamental analysis, it is hard not to like a stock when the company is so dominant in its field and it’s trading at a forward P/E of around 12.5, a significant discount to the market as a whole.
It seems that AAPL has finally found a bottom, so to my mind the prospects for this particular turkey look pretty good.
Tesla (YTD +88.3%): Ok, so 88.3% this year hardly makes TSLA a turkey, but the 33% drop in the stock since the end of September has been pretty spectacular.
As with AAPL, I saw this one coming. The reason was different, but there were many similarities to the AAPL situation. In this case, what worried me most was that TSLA had not made a profit, but was trading at ridiculous multiples of optimistic forecasts for future profits. They faced a few headwinds, but the religious like devotion of the stock’s adherents (evident in the dismissive tone of the comments I received) had led many to believe that the stock could just keep on going up.
That devotion has, if anything, increased since the bubble burst and TSLA has come under pressure. The media focus on the recent fires was undoubtedly over the top, but complaining about it and attacking anybody who writes a negative piece about the stock doesn’t help.
From a more fundamental point of view, while I have every confidence that these problems will turn out to be a storm in a teacup and that TSLA will deal with them, they could still have yet more negative impact on the stock.
As I said, to me and many neutral observers the biggest problem with TSLA is that they are still not profitable if GAAP is used. Dealing with the fire problem will only delay that profitability, and less fanatical investors are becoming impatient. There is bound to be some support at around the 100 level, but until we get there or until they turn the corner towards consistent profitability, I will be leaving TSLA alone.
I can’t claim to have called the top of this one, but did write back in September that the stock should be left alone as hedge funds battled over its fate.
The last week or so, however, has been intriguing, and, for those with a trader’s mindset, JCP is setting up to be an interesting play. The earnings report last week was, while better than recent efforts, still pretty dismal. JCP continues to lose money and barely met pessimistic forecasts, yet the stock jumped around 10% following the release.
For those like me who consider market dynamics as the main short term driver of the price of anything, there is a reason other than a somewhat optimistic forecast for the holiday shopping season. This looks and smells like a short squeeze. Short interest had increased as the stock had fallen and traders love to put pressure on short sellers.
With that upward pressure and the fact that JCP could well meet or even exceed those optimistic forecasts, a pop from here looks likely. In the longer term, however, the fact remains that JCP has been hemorrhaging cash for a while and has gone deeply into debt, so it won’t be long before commentators start to once again question the very survival of the company.
For those with a penchant for options this sets up a basic calendar spread. At the time of writing, May $10 JCP calls can be sold for around $2.00 and the proceeds used to purchase Jan 18th $10.00 calls at around $1.05. Should the holiday season give false hope as I expect, then you will have an opportunity to sell the short dated calls at a profit and stay short JCP at a decent average as reality begins to bite.
All three turkeys have different prospects. AAPL looks like a straight out buy at current levels, TSLA faces continued pressure, but may be a buy before too long, and JCP is in the opposite situation; decent short term prospects but long term problems.
They all present opportunities for investors and traders, but for now, I will be focusing on a different type of turkey. If you live in the US then I hope you do too, but whether you do or not, I would still like to wish everybody a very happy Thanksgiving!
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Martin Tillier has a wealth of experience in Foreign Exchange. He started working for a major interbank Forex broker in London in the 1980s, rapidly acquiring more responsibility and the authority to run larger positions. After several years, he was asked to go to Tokyo to develop the cable (USD/GBP) desk there. He returned to London at a time of turmoil in European currency markets and helped build the company's Sterling Mark (GBP/DEM) desk into the world's most profitable, in the years leading up to the Euro. Highlights included a 36 hour unbroken stint at the desk during black Wednesday, when the Pound was forced out of the European Monetary System. Because of his success in London and his ability to teach new recruits the complex world of Forex trading, Martin was asked to establish Spot FX desks in new markets for the company, first in Moscow, Russia, then in Warsaw, Poland. He left the market in 2002 and moved to the US, following the loss of a family member in the tragic events of September 11th 2001. He spent some time out of the markets, starting and running a successful wine store, but the lure of the financial world was still strong, leading to him selling that business and accepting a position as a financial advisor with a major firm. The frustration he felt while there is what led him to his current position as a writer and educator on markets, particularly Foreign Exchange. The markets were more accessible than ever, but it seemed Wall Street was still doing fine. It was obvious that the retail trader and investor were at a disadvantage, and education could close that gap. Martin now writes regularly for Nasdaq.com and other financial sites, trades Forex and other markets successfully and, in his spare time, plays golf badly. |
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