Monday, April 23, 2012

SNE: Ailing giant

Sony Corp. (SNE) once filled the consumer technology niche that Apple now owns, dominating the hearts and minds of the hip and the young. Remember the Walkman?

Anymore, the Tokyo, Japan electronics company is a bit stodgy and struggling to make a living. It once floated on its cutting edge tech. The argument can be made that the blade has grown dull. When I look at Sony, I see an ailing giant.

Which is not to say that Sony isn't still a powerhouse. It makes TVs, cameras, semiconductors, batteries, data recording systems, game consoles and the games that run n them, films, TV programs, music, sofware... It sells insurance, both life and the other kinds, banking services and advertising agency services.

It innovates. It invented the Blu-Ray disk, for Pete's sake!

So it seems so contrary to my expectations to see Sony on the Zacks top-sell list. It doesn't have the most bearish chart among the 16 stocks added to the list over the weekend. That "honor" goes to a Spanish company called Repsol YPF SA (REPYY).

But REPYY has no options, and therefore lacks the tools I need to construct a bearish position to my liking. So I'm analyzing Sony, trading under its American depository receipt SNE. Also, Sony is a lot more interesting.

SNE peaked in 2000, traded sideways from 2003 to 2008, declined into 2009 to a low of $15.64, rose again to $40.45 in 2010, and then fell again and today is trading at less than a dollar above its recession low.

Truly, this is one of the saddest long-term charts I've ever seen.

SNE began its most recent leg down on Feb. 29 from $21.79, stairstepping a couple of times  before moving into downward plunge from $21.32 on March 28. The leg hit a low in today's trading of $16.28.

To me, the key feature of the chart is the lows from 2009 onward. SNE bounced from $15.64 in 2009, and again from $16.16 in 2011. Today's low, so far, of $16.28 is within easy range of a similar bounce if that level of resistance still holds.

Sony has a negative return on equity, a loss on equity of 23%. Long-term debt amounts to 49% of equity, which is high but not crippling.

Institutions own only 6% of shares in SNE, but serious big-time institutions will trade on the Tokyo exchange, where Sony's ticker number is 6758. At this price, it takes 21 cents in SNE shares to control a dollar in sales.

Sony has shown a loss in seven out of the past 11 quarters.

SNE on average trades 4.1 million shares, enough to support a good selection of option strikes with 3-figure open interest and narrow bid/ask spreads.

Implied volatility stands at 36% and has been rising since hitting a six-month low of 31% on April 16.

Options traders are pricing in a 68.2% chance that the stock will close between $14.80 and $18.20 a month from now, for a 10.3% gain or loss.

Given the sharpness of the rise in implied volatility, I would play SNE as a net debit position, such as a bear put vertical spread.

Sony next publishes earnings on June 8. The stock goes ex-dividend, most likely in September, for the semi-annual payout yielding 1.92% annualized.

Decision for my account: However bearish the analysts might be, the two bounce levels discussed above seem serious to me. I will defer opening any bear position on SNE until it, at the least, breaks below $16.16 and even better, below $15.64.

Methodology

I screened the stocks using a tourney bracket with a one-month daily chart and a three-day half-hour chart, and then turned to a five-year weekly chart for the broad context in analyzing the bracket winner. See my essay "10,000 Charts" for a discussion of my screening methods.
Disclaimer

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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