- Why IFCM
- Market Data
- For Business
This product is based on relative fundamental analysis of six global energy companies: British Petroleum (BP), ExxonMobil (XOM), Total (TOT), Petrobras (PBR), Chevron (CVX), Occidental Petroleum (OXY). Each company is involved in gas and oil production all over the world and is a major issuer, stocks of which are traded on NYSE.
The main financial indicators from financial reports (profitability, revenue, book value of stocks) are of limited relative value – they differ significantly from industry to industry. These indicators can be used for conducting objective valuations for only issuers belonging to the same industry. This product is based on the analysis of the energy sector.
The following indicators will be considered as the main criteria:
Comparison of the first two ratios allows to evaluate the profitability (effectiveness) of the company – the ratio of the average annual earnings per share to the book value per share – E/B. Let us consider two groups of stocks, highlighted in grey and green in the table below. The stocks are classified on the basis of profitability: <5 and >5. The average correlation with the industry in the first and second group is 55% and 44% respectively. We consider the company profitability as the indicator for the investment appeal, and the number inversely proportional to the market cap – as the indicator of risk. The relative weights in each group are determined on the basis of the product of two factors: (Cap)x(E/B). Since the weights in each group comprise 100% it can be stated that each group’s business is comparable in terms of profitability/risk level – the group’s response to industry fundamental factors must also be comparable for the period under consideration.
We suggest to use this idea for long term trading strategy for a product composed on the basis of PCI GeWorko model. In the base part of the product we placed stocks of three companies: British Petroleum (14%), Chevron (83%), Occidental Petroleum (3%). Investment weights are indicated in parentheses in percentages. The quoted part is comprised of stocks from the second group: Total (27%), Petrobras (10%), ExxonMobil (61%). The purchase transaction for the product will correspond to the purchasing of the base part and selling of the quoted part for the equivalent amount.
The trading strategy for the product is based on the analysis of its price range, that is the ratio of the values of the base and quoted parts at different points in time. We believe the historical range of price fluctuations (using annual indicators for analysis) will remain unchanged during the next quarter. At the moment it has edged close to the annual maximum. This makes it possible to consider the product as overvalued at this price and use the opportunity to sell it: sell the stocks of the first group and buy the second group of stocks. In the last two years the maximal price of the product reached the 1.14346 level, which can be used for risk control. In this case the ratio of the maximal profit at the lower bound of the range is more than twice the risk. Conservative traders are suggested to partially limit the risks at the middle of the range, at the level 0.92629.
Recommended horizon: three months
Recommended amount: > $2000
Stop loss: 10% of the capital, or the level 1.14346
Additional signals: monthly analytical reports