Is Sony a Risky Investment?

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.

Sony on Wednesday announced its consolidated financial results for the fiscal year ended March 31, 2014. Sales and operating revenue were 7,767.3 billion yen (75,410 million U.S. dollars), an increase of 14.3 percent compared to the previous fiscal year. This increase was primarily due to the favorable impact of foreign exchange rates, the launch of the PlayStation4, as well as a significant increase in sales of smartphones. Operating income decreased 200.0 billion yen year-on-year to 26.5 billion yen (257 million U.S. dollars). This significant decrease was primarily due to a year-on-year decrease in gains on the sale of assets and remeasurement gains, a recording of 91.7 billion yen (890 million U.S. dollars) in losses related to the PC business, including restructuring charges, compared to 38.6 billion yen in PC business-related losses recorded in the previous fiscal year, and a recording of impairment charges in the battery business and in the disc manufacturing business.

T = Technicals on the Stock Chart are Weak

Sony stock has seen its fair share of struggles over the past few years. The stock is currently pulling back and may need time to stabilize before heading higher. 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

27.17%

3%

0%

What does this mean? This means that investors or traders are buying a 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 low demand by put buyers or high demand by put sellers, all neutral to bearish over the next two months. To summarize, investors are buying a 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)

14.30%

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 had conflicting feelings about 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

-5.55%

5.91%

1.09%

1.92%

1.84%

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 reported earnings on Wednesday that left investors conflicted. The stock has seen its fair share of struggles over the past few years and is currently pulling back. Over the last four quarters, earnings and revenues have been on the rise. 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.

More from Wall St. Cheat Sheet: