Fundamental Short Selling Research

Eric Fernandez, CFA

TwoRiversAnalytics

Equity Bottom-Up

Cf Industries Holdings / Equity Bottom-Up

<ul>
<li>This model seeks companies that are potentially “overearning”, defined as companies with unusually high margins relative to their own history or relative to the industry. </li>
<li>The reasons for the margin increases are sometimes unsustainable or fraudulent. The  critical judgement involves to what extent unsustainable margins are embedded in a company’s forecasts and/or the stock’s valuation. </li>
<li>These shorts tend to have moderate to higher betas, higher valuations due to recent strong results and good short responses to subsequently disappointing earnings.</li>
</ul>


This model seeks companies that are potentially “overearning”, defined as companies with unusually high margins relative to their own history or relative to the industry. 
The reasons for the margin increases are sometimes unsustainable or fraudulent. The  critical judgement involves to what extent unsustainable margins are embedded in a company’s forecasts and/or the stock’s valuation. 
These shorts tend to have moderate to higher betas, higher valuations due to recent strong results and good short responses to subsequently disappointing earnings.


Overearning Short Candidates, CF Industries, Photronics, LSB Industries, Builders FirstSource

Research from Water Tower Research, Water Tower Research

Water Tower Research

Research from Water Tower Research

Water Tower Research is a leading equity research firm that provides research on micro, small and mid cap companies.

Water Tower Research was founded by Wall Street veterans after witnessing a fundamental shift in the investment research industry with the result being a declining knowledge base among investors, a lack of awareness and a shrinking pool of fundamental research being conducted on companies across the small-cap and micro-cap spectrum. The same issues are now increasingly occurring in the mid-cap space. This sea change within the investment community is impacting not only the companies themselves but also current shareholders and potential investors. With significantly less active sell-side sponsorship by Wall Street, a substantial information gap has developed between companies and various constituents in the financial community. The net result is fewer channels for insight and information to flow between companies and investors.

Equity Research Firm

Technical Analyst, Vermilion Research

Joe Jasper

Technical Analyst

Technical and Quantitative Research

Vermilion Research

Vermilion’s objective is to deliver timely, actionable, and unique technical research to professional investors through the application of our various technical indicators.

Our research strategists seek to highlight securities which we believe are at major inflection points, based on our various technical and quantitative indicators, and offer asymmetric risk/return profiles. Our unique research methodology, centered on relative strength, enables our strategists to deliver superior investment recommendations.

Our process begins by organizing the universe of actively traded stocks into discrete sectors, then into industry groups. We then apply our technical and quantitative tools to identify developing price trends. Once attractive trends are identified within a selected sector or group, we screen for individual stocks which we believe offer the best risk/reward profile. We provide a historical perspective that often reveals, through our long-term charts, how price patterns often repeat themselves over time.

Technical Analysis

Technology Select Sector SPDR / Technical Analysis

<ul>
<li>Our outlook remains bearish at the index level considering we have yet to see any developments that suggest a bottom is in. </li>
<li>The S&amp;P 500, Nasdaq 100 (QQQ), Russell 2000 (IWM), and Russell Micro Cap (IWC) indexes remain in downtrends.</li>
<li>In today’s report we highlight attractive Groups and stocks within Materials, Manufacturing,  Services, and Utilities: MA-14 Fertilizer, MF-15 Railroad Equipment &amp; Products, SV-13 Construction &amp; Engineering, Large-Cap, UT-04 Electric, Mid-Atlantic</li>
</ul>


Our outlook remains bearish at the index level considering we have yet to see any developments that suggest a bottom is in. 
The S&amp;P 500, Nasdaq 100 (QQQ), Russell 2000 (IWM), and Russell Micro Cap (IWC) indexes remain in downtrends.
In today’s report we highlight attractive Groups and stocks within Materials, Manufacturing,  Services, and Utilities: MA-14 Fertilizer, MF-15 Railroad Equipment &amp; Products, SV-13 Construction &amp; Engineering, Large-Cap, UT-04 Electric, Mid-Atlantic


<ul>
<li>Our key "lines in the sand" were tested last week, including 4257 on the S&amp;P 500, $334 on QQQ, 33,250 on the DJIA, and $102.50 on the S&amp;P 600 (IJR).</li>
<li>After a brief dip below these levels, buyers immediately stepped up and reclaimed these supports. It was a clear win for the bulls (for now).</li>
<li>Attractive and actionable Groups highlighted include fertilizer (ag chemicals), aerospace/defense, and shipping.</li>
</ul>


Our key "lines in the sand" were tested last week, including 4257 on the S&amp;P 500, $334 on QQQ, 33,250 on the DJIA, and $102.50 on the S&amp;P 600 (IJR).
After a brief dip below these levels, buyers immediately stepped up and reclaimed these supports. It was a clear win for the bulls (for now).
Attractive and actionable Groups highlighted include fertilizer (ag chemicals), aerospace/defense, and shipping.


Volatility & Consolidation Continues; Buying Ag Chemicals, Aerospace/Defense, and Shipping Stocks

US Treasury (10 Yr Generic) / Technical Analysis

<ul>
<li>Our bottom line is that we could not be bearish as long as the IWM is above $208, the IWC is above $134-$135, and the S&amp;P 500 is above 4495.</li>
<li>These support levels have held strong, and we are now seeing the aforementioned risk-off signals starting to abate.</li>
<li>This is an encouraging sign and we remain constructive as long as the above support levels hold.</li>
</ul>


Our bottom line is that we could not be bearish as long as the IWM is above $208, the IWC is above $134-$135, and the S&amp;P 500 is above 4495.
These support levels have held strong, and we are now seeing the aforementioned risk-off signals starting to abate.
This is an encouraging sign and we remain constructive as long as the above support levels hold.


Risk-Off Signals Abating; Cyclicals Reassert as Rates Rise; Buying Fertilizer and Copper Stocks

United States

Westlake Chemical Corporation manufactures and markets basic chemicals, vinyls, polymers, and fabricated products.  The Company serves a range of consumer and industrial markets, including flexible and rigid packaging, automotive products, coatings, and residential and commercial construction.

Albemarle Corporation produces specialty and fine chemicals.  The Company's chemicals are additives to or intermediates for plastics, polymers and elastomers, cleaning products, agricultural compounds, pharmaceuticals, photographic chemicals, drilling compounds, and biocides.  Albemarle produces the majority of its products in the United States.

Axalta Coating Systems Ltd. manufactures, markets and distributes coatings systems. The Company offers products and services which includes paint, color matching tools, application technologies, and customer  training and business management systems. Axalta Coating Systems serves automotive, transportation,  general industrial, and architectural and decorative sectors.

FMC Corp operates as a diversified research company in the chemical industry. The company offers technology solutions for agricultural, industrial, and consumer markets. FMC Corp offer an array of technologies in research and development to improve delivery of medications, enhance foods and beverages, power batteries, protect crop yields, and advance textile manufacturing.

RPM International, Inc. manufactures, markets, and sells various specialty chemical product lines. The Company's product lines include specialty paints, protective coatings and roofing systems, sealants and adhesives, focusing on the maintenance needs of both the industrial and consumer markets.

Celanese Corporation is a global integrated producer of chemicals and advanced materials. The Company's products include acetyl, acetate, vinyl emulsion, and engineered polymers. Celanese Corp's operations are primarily located in North America, Europe and Asia.

Eastman Chemical Company is an international chemical company which produces chemicals, fibers, and plastics.  The Company's operations include coatings, adhesives, specialty polymers, and Inks, fibers, performance chemicals and intermediates, performance polymers, and specialty plastics.

The Mosaic Company produces and distributes crop nutrients to the agricultural communities located in North America and other countries.  The Company's principal products include concentrated phosphates, and potash.

Element Solutions Inc operates as a specialty chemicals company. The Company manufactures and supplies specialty chemicals used by the electronics, metal and plastic plating, graphic arts, and offshore oil production and drilling industries. Element Solutions serves customers worldwide.

Huntsman Corporation manufactures differentiated and commodity chemical products.  The Company markets a broad range of chemical products and formulations to a diversified group of consumer and industrial customers. Huntsman's products are used in a range of applications, including those in adhesives, aerospace, automotive, construction products, and consumer products.

TORAY INDUSTRIES, INC. manufactures yarns, synthetic fibers, and man-made leather used as apparel and industrial materials.  The Company also makes chemical products such as polyester films, engineering plastics, and resin materials.  Toray develops information equipment such as electronic circuit and liquid crystal color filter.

LG Chem Ltd. is a chemical manufacturer.  The Company's products include petrochemicals, plastic resins, and engineering plastics.  LG Chem also produces industrial and electronic materials.

NITTO DENKO CORPORATION manufactures and markets a wide range of chemical products which are used as materials for industrial and electronic components. The Company's products include materials for sealants, semiconductors, and wrappings.  Nitto Denko has a network of sales/manufacturing subsidiaries worldwide.

Formosa Chemicals & Fibre Corporation manufactures and markets petrochemical products, nylon fiber, and rayon staple fiber.  Formosa sells its products in Taiwan and exports to Asia.

Solar Industries India Limited manufactures and supplies explosives and explosives accessories. The company's products include bulk, cartridge, detonators, detonating cords Pentaerythritol Tetranitrate ("PETN"), and cast boosters.

Satelltte Chemical Co., Ltd. develops, manufactures and sells acrylic acid esters, methacrylic acids, pigment intermediates, acrylic emulsion polymers, super absorbent polymers, and other acrylic downstream products.

Qinghai Salt Lake Industry Co.,Ltd manufactures and markets fertilizer products. The Company produces potash fertilizers, potassium chloride, and other products. Qinghai Salt Lake Industry also produces salts, chemicals, and other products.

Berger Paints India Limited manufactures and distributes paints, enamels, varnishes, and synthetic resins. The Company's products are used in home, office, factory, interiors, exteriors, metal, wood, plastic, and others.

Sichuan Tianqi Lithium Industries, Inc. develops, manufactures and sells lithium products.  The Company's products include industrial lithium carbonate, battery lithium carbonate, lithium chloride, and lithium hydroxide.

The Fertilisers and Chemicals Travancore Limited manufactures petrochemicals and fertilisers.  The Group's products include Ammonia, Sulphuric Acid, Phosphoric Acid, Ammonium, Urea, Caprolactam, Nitric Acid and Soda Ash.

CF Industries Holdings, Inc. manufactures and distributes nitrogen and phosphate fertilizer products globally. The Company's principal products in the nitrogen segment are ammonia, urea, urea ammonium nitrate solution, ammonium nitrate, diesel exhaust fluid and aqua ammonia. The principal products in the phosphate segment are diammonium phosphate and  monoammonium phosphate.

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Cf Industries Holdings (CF US)

Overearning Short Candidates, CF Industries, Photronics, LSB Industries, Builders FirstSource

Margin over-earners are fertile hunting ground for shorts if the reasons for the margin increase are either unsustainable or fraudulent: CF...

Eric Fernandez, CFA

Greener Crops, Greener Planet

KEY POINTS Crop supply struggles to keep up with demand. Grain demand remains robust, driven by a growing global population and a rising middle...

Water Tower Research

Downgrading Technology To Underweight

Downgrading Technology to underweight. Attractive and actionable stocks highlighted: Fertilizer, Railroad Equipment & Products, Construction &...

Vermilion Research

Volatility & Consolidation Continues; Buying Ag Chemicals, Aerospace/Defense, and Shipping Stocks

Moving forward we continue to expect more volatility and consolidation between 4257 and 4590-4595 on the S&P 500, and between $334 and $367 on the...

Vermilion Research

Risk-Off Signals Abating; Cyclicals Reassert as Rates Rise; Buying Fertilizer and Copper Stocks

Risk-off signals are abating which is an encouraging sign. Charts Highlighted: IWM, IWC, JETS, BAM, CBRE, INVH, JLL, HHC, JOE, MMI, APTS, CTO, AMT,...

Vermilion Research

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