Friday, June 6, 2014

ESRT: A story turned sour

Empire State Realty Trust Inc. (ESRT) owns the Empire State Building and began trading with its initial public offering on Oct. 2, 2013.

It's a great story stock -- who wouldn't want to buy what was once the tallest building on Earth? The building King Kong climbed? The building where Blair Waldorf arrived too late to save her love affair with Chuck Bass?

But the story turns sour when faced with the hard contradictions of the chart and the financial.

The Chart

Rather than wrestle with trying to locate ESRT within the longer-term journey of the real-estate sector, I've chosen to focus in on the near term, which counts nicely as four waves in an uptrend since the IPO, with the 5th wave underway.

A glance at the 10-year weekly chart for IYR, the iShares U.S. Real Estate exchange-traded fund, shows the sector in a 3rd or 5th wave up in, perhaps, the {+4} degree from its recession low in 2009, with there being a possibility that a downward correction began a year ago in May 2013.

If ESRT is indeed jumping into the middle of the show with a correction underway, then wave 5 would be part of an A-wave within a B-wave of higher degree.

Click on chart to enlarge.
ESRT 180 days 4-hour bars (left), 15 days 5-minute bars (right)
Nearer term, the question is how close ESRT is to completing wave 1 {+1}, which has carried the price up 32.9% from the IPO opening price. The ensuing wave 2 {+1} correction will be significant, and if is imminent, my best tactic as a trader is to wait for the correction and buy at bargain prices.

ESRT his an all-time high on June 5. Establishing the nature of that high means getting the degrees right within wave 5 {-1}, which began may 30. I've chosen as my primary analysis to count the rise from May 30 to June 5 as being of the {-3} degree, two degrees down from the enclosing wave 5 {-1} that began May 30.

I've based that decision on duration. Wave 5 {-1} has lasted for only a week so far. It's companion, wave 1 {-1} last year endured for a month plus a few extra days. While it's possible under the Elliott wave rules that wave 5 {-1} could be over in a week, it seems to be the less likely alternative.

By that count, the peak is the end of wave 1 {-2}, meaning that ESRT will now correct the part of the 6.7% rise from May 30, a much less serious proposition than correction part of the entire rise since trading began.

My alternate count moves the internal wave's up a degree, to {-2}. That alternative would mean that the June 5 peak is the end of wave 5 {-1}, and indeed of wave 5. The alternative scenario means that the correction of the entire rise since October 2013 is now underway.

ESRT dropped a bit after hitting its peak and today has reversed to the upside. If that rise exceeds $17.34, the peak price, then my primary scenario is the correct one. If it instead reverses and declines further, roughly below $17, then the alternative super-bearish count is most likely correct.

Options are pricing in confidence that 68.2% of trades will fall between $16.20 and $18.24 over the next month, for a potential gain or loss of 5.9%, and between $16.73 and $16.71 over the next week.

ESRT pays a reasonably good dividend and so is also a candidate for a bull play under my longer-term rules. The 68.2% confidence range over the next year is from $13.68 to $20.76.

I've marked the lower boundary of the monthly range on the left-hand chart in blue.

Odds and Yields

ESRT has completed two bull signals since trading began in October 2013. Both were successful, on average yielding 5% over 46 days. ESRT has been trading for such a short amount of time that it's difficult to draw any conclusion from those numbers.

The Company

Empire State Realty Trust is a real-estate investment trust that manages office and retail properties in the New York metro area. It's signature holding is the Empire State Building on Manhattan.

Empire is followed by too few analysts to calculate an enthusiasm index, but for the most part, they're successfully curbing their enthusiasm somewhat.

The company has been trading for less than a year and so it is impossible to calculate definitive numbers for some of the financial ratios.

A preliminary calculation of return on equity is 44%, which is quite high, but the number must be seen as tentative. Long-term debt is running 20% above equity, which is also quite high.

Earnings also are tentative. Well, let me rephrase that. The figures that I'm getting from my broker's pages make absolutely no sense whatsoever. None. It's the standard package of fundamentals, so my broker isn't to blame. It's just the nature of things for a company that's new to the exchanges.

The earnings yield comes out to 138.42%, which would mean that the stock is selling for just a bit less than three-fourths of earnings, a discount. Yet it is at a steep premium to sales; it takes $3.99 in shares to control a dollar of sales.

And if you believe those numbers strongly enough to trade on them, I've got a bridge in Manhattan I'd love to sell you.

Empire has reported earnings twice, the first time was a steep loss and second a small gain, each with a negative earnings surprise. Since it takes three data points to make a trend, I can't even say the earnings trend is up.

Estimates of earnings and growth going forward, from Zacks Investment Research, make a lot more sense.

The estimates, combined with the 1.98% dividend annualized at today's prices, imply that a "fair" price for ESRT would be $2.71, meaning that the shares are overpriced more than five times over.

The dividend yield, by the way, is less than I could get from the 10-year U.S. Treasury note, which is going for 2.5% today. So although ESRT may be a dividend play, it needs continuing capital gains to make sense.

Institutions own 96% of shares.

No date yet on the next earnings announcement. The stock goes ex-dividend June 11 for a quarterly payout of 8.5 cents.

Liquidity and Volatility

ESRT on average trades 1.9 million shares per day and supports a moderate selection of option strike prices spaced $2.50 apart near the money with no open interest to speak of. The front-month at-the money bid/ask spread on calls is 38%, compared to 0.43% on the most-traded symbol on U.S. markets, the exchange-traded fund SPY.

The options are too illiquid for my taste and any position I take will be as long shares. This would also allow me to capture the dividends.

Implied volatility stands at 21% and has been moving lower in wide swings since peaking April 11 at 57%. The S&P 500 index, by contrast, has implied volatility of 11%.

ESRT's volatility stands at the 29th percentile of the range since the IPO.

Option trading today is heavily skewed toward calls, which are running 43% above their five-day average volume. Puts are running at only 21% of their average volume.

Decision for My Account

ESRT truly is a great story stock. Its IPO was widely reported because of the Empire State Building connection. That gives the stock glamour and a sense of history, wealth and permanence. For a retail investor looking for a dividend play, what's not to like?


The chart bearish under both the primary and the alternate count. The only distinction is the degree of bearishness. The alternate count is "Katy bar the door".

Even more than the chart, the contradictory messages within the financials, and the paucity of information on any new exchange listing, including this one, give me pause.

The fact is, there is very little baseline available for Empire.  This is why I have a rule against trading a stock in the first year after its IPO. I want to see at least one annual report before I commit funds.

The best data available now, I think, is that from Zacks, the forward estimates. They show a stock that is hugely overpriced in relation to estimated growth. To get a since of that, I calculate a number called the PEG -- price-earnings-growth -- and if there's a dividend, I adjust it to become the PEGY -- the Y means "yield".

A PEG or PEGY of 1.00 means that the price is precisely aligned with the estimates and dividend, if any. The PEGY for ESRT is 4.25, a huge discrepancy between assessments of the stock's future.

So either the markets are wrong or the estimates are off.

I have no abiding faith in either. In fact, they have different purposes. Markets price in hope over an unknown span of time, and also not a small amount of emotion, as well. The estimates calculate results over a specified span of time, without hope and without emotion.

When I see this large of a discrepancy, I don't try to decide which view is correct. I simply note a very large red flag of warning.

I don't intend to open a bull position in ESRT at this point. It may well develop into a decent shorter-term speculative play or, indeed, a longer-term dividend play. But at this price and in this information environment, under my rules, it's not suitable for either.

-- Tim Bovee, Portland, Oregon, June 6, 2014


My shorter-term trading rules can be read here. My longer-term trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

I use the number 68.2% in using applied volatility to calculate the expected trading range. This comes from statistics and refers to the one standard deviation boundaries, which are expected to contain 68.2% of whatever is being studied. Putting it another way, given an item (a trade or whatever), there is a 68.2% chance that it will appear within those boundaries.

Elliott wave analysis tracks patterns in price movements. The principal practitioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading

Several web sites summarize Elliott wave theory, among them, Investopedia, StockCharts and Wikipedia.

See my post "Chart Analysis: Nomenclature" for an explanation of my method for labeling waves on the chart.

By preference I place my shorter-term trades in the last half hour before the closing bell in New York. See my essay "When is the best time to trade" for a discussion of the practice.

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 decisions for his or her own account, and take responsibility for the consequences.

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