Will Sony Head Higher After Recent Headlines?

With shares of Sony (NYSE:SNE) trading around $16, is SNE an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Sony is involved in the electronics, games, entertainment, and financial businesses. The company operates in several different segments: Consumer Products Services, Professional Device Solutions, Movie, Music, Finance, Mobile, and Other. Through its segments, Sony is able to provide a wide range of products and services. These products include televisions, cameras, personal computers, game consoles, navigation systems, audio and video equipment, software, phones, and media platforms. The company brings new technologies to the hands of the average player as well as professional users. Look for Sony to continue to be a top choice for avid technology adopters worldwide.

Back in January, China ended a 14-year ban on foreign companies selling video game consoles in the country. That was good news for Sony, Microsoft (NASDAQ:MSFT), and Nintendo (NTDOY.PK), as China is a huge potential market, with nearly half a billion gamers and revenues of almost $14 billion. So far, Microsoft and Nintendo have announced plans to sell consoles in China, but Sony had been silent on the issue — until today. Sony has just revealed that it will set up two joint ventures with Shanghai Oriental Pearl Group to sell PlayStation hardware and software. Although the Chinese government has loosened the rules to allow foreign game makers to sell their wares in the populous country, they’re not making it easy. Each company wishing to do so has to partner with a Chinese company and operate out of the Shanghai free trade zone. Microsoft is working with BesTV New Media and plans to release the Xbox One in China this September. Nintendo hasn’t detailed its plans, but says it will make new hardware to sell in China. Sony will partner with Shanghai Oriental Pearl Culture Development Ltd., but has yet to reveal when its products will hit the shelves in China. In fact, Sony hasn’t even announced which hardware it will release in China, although it will likely include the PlayStation 4 to compete against Microsoft’s Xbox One.

Despite the country’s sizable gaming market, The New York Times says that selling consoles in China could prove more challenging than in the other game markets of the world, like Japan, the United States, and Europe. In part that’s because Chinese gamers have spent the past 14 years playing games on PCs and mobile devices, so there’s no “console culture” like there is elsewhere in the world. Chinese gamers have also grown accustomed to the “free-to-play” model, in which publishers let anyone download their games for free, but charge money for in-game power-ups or extra content. The free-to-play model has begun taking root in mobile and PC gaming in the U.S., but has yet to make much of an impact on consoles.

T = Technicals on the Stock Chart Are Mixed

Sony stock has seen its fair share of struggles over the past few years. However, the stock is currently surging higher and looks poised to continue. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Sony is trading below its rising key averages which signal neutral to bearish price action in the near-term.

SNE

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Sony options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Sony options

24.79%

0%

0%

What does this mean? This means that investors or traders are buying a very small amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

June Options

Steep

Average

July Options

Steep

Average

As of today, there is an average demand from call buyers or sellers and high demand by put buyers or low demand by put sellers, all neutral to bearish over the next two months. To summarize, investors are buying a very small amount of call and put option contracts and are leaning neutral to bearish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Sony’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Sony look like and more importantly, how did the markets like these numbers?

2014 Q1

2013 Q4

2013 Q3

2013 Q2

Earnings Growth (Y-O-Y)

222.22%

115.39%

22.71%

82.5%

Revenue Growth (Y-O-Y)

14.3%

23.86%

10.64%

-8.96%

Earnings Reaction

-6.46%

3.89%

-11.17%

4.37%

Sony has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have been pleased with Sony’s recent earnings announcements.

P = Weak Relative Performance Versus Peers and Sector

How has Sony stock done relative to its peers, Microsoft (NASDAQ:MSFT), Canon (NYSE:CAJ), Dolby Laboratories (NYSE:DLB), and sector?

Sony

Microsoft

Canon

Dolby Laboratories

Sector

Year-to-Date Return

-3.93%

6.84%

1.09%

7.29%

3.82%

Sony has been a poor relative performer, year-to-date.

Conclusion

Sony is a provider of innovative technology products to consumers and companies worldwide. The company has just revealed that it will set up two joint ventures with Shanghai Oriental Pearl Group to sell PlayStation hardware and software in China. The stock has seen its fair share of struggles over the past few years but is currently surging higher. Over the last four quarters, earnings and revenues have been on the rise, which has left investors pleased. Relative to its peers and sector, Sony has been a poor year-to-date performer. WAIT AND SEE what Sony does this quarter.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.

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