Can Sony Break Higher?

With shares of Sony (NYSE:SNE) trading around $17, 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 your average player as well as professional users. Look for Sony to continue to be a top choice for avid technology adopters worldwide.

Sony has changed its mind about selling its lithium ion battery division, according to a report from the Nikkei newspaper seen by Reuters. The company had been working towards selling the unit, but has decided to abandon those plans as the weak yen and higher demand for smartphone batteries has given the company some hope about the unit’s prospects. Sony has been trying to sell the unit for two years as it has failed to perform in the face of competition from cheaper rivals based in South Korea. Nikkei reported that Sony’s battery division has seen a slight increase in its business as of late. A turnaround fund from the Japanese government tried to push a sale of the unit to automaker Nissan (NSANY.PK) earlier this year, but no progress has been made and Sony told the fund it now plans to keep the unit, according to anonymous sources who spoke to Nikkei.

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

33.11%

83%

80%

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

Put IV Skew

Call IV Skew

January Options

Steep

Average

February 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 significant 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?

2013 Q3

2013 Q2

2013 Q1

2012 Q4

Earnings Growth (Y-O-Y)

22.71%

82.50%

125.35%

93.93%

Revenue Growth (Y-O-Y)

10.64%

-8.96%

-5.41%

-4.07%

Earnings Reaction

-11.17%

4.37%

0.78%

-4.36%

Sony has seen increasing earnings and rising revenue figures over the last four quarters. From these numbers, the markets have had conflicting feelings about Sony’s recent earnings announcements.

P = Excellent 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

55.18%

39.07%

-18.60%

30.48%

27.53%

Sony has been a relative performance leader, year-to-date.

Conclusion

Sony is a provider of innovative technology products to consumers and companies worldwide. The company has changed its mind about selling its lithium ion battery division. The stock has struggled in recent years and is now pulling back. Over the last four quarters, earnings have increased while revenues are improving. However, investors have had conflicting feelings about recent earnings announcements. Relative to its peers and sector, Sony has been a year-to-date performance leader. Look for Sony to OUTPERFORM.

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