Citigroup’s worst-of autocallables tied to oil, gold ETFs offer good value, contrarian says

By Emma Trincal

New York, May 17 – Citigroup Global Markets Holdings Inc.’s autocallable contingent coupon equity-linked securities due May 31, 2024 linked to the lesser performing of the SPDR S&P Oil & Gas Exploration & Production exchange-traded fund and the VanEck Vectors Gold Miners ETF make for a good contrarian pick as both underlying funds are relatively “unloved” and depressed, said Steven Jon Kaplan, founder and portfolio manager at TrueContrarian Investments.

Each quarter, the notes will pay a contingent coupon if the lesser-performing ETF closes at or above its barrier value, 60% of its initial level, on the valuation date for that quarter, according to a 424B2 filing with the Securities and Exchange Commission.

The contingent coupon rate is expected to be 9% to 10% per year and will be set at pricing.

The notes will be automatically called after one year if the lesser-performing ETF closes at or above its initial level on any quarterly potential redemption date.

If the final level of the lesser-performing ETF is greater than or equal to its barrier value, the payout at maturity will be par. Otherwise, investors will lose 1% for every 1% that the lesser-performing ETF declines from its initial level.

Oil still low

“I like the fact that both gold and energy are unpopular. From a contrarian perspective, it’s a good thing,” said Kaplan.

“Energy was very out of favor in December. A lot of insiders were buying XOP at that time. We had a big rally and this month, it’s going down again.”

The share price is down 35% from its 52-week high of October.

The SPDR S&P Oil & Gas Exploration & Production ETF, which is listed on the NYSE Arca under the ticker “XOP,” offers indirect exposure to oil prices via the stocks of energy companies.

Insider trading

Right now, both funds are trading in a range, he said, making it harder to predict the moves on a short-term basis.

But insider purchases provide useful information, which may not be visible on a chart.

“If you look at the components of the fund – and I have – you’ll see that some of the stocks recorded huge amounts of insider buying in the fourth quarter of last year,” he said.

“Matador for instance saw in December its heaviest insider buying ever. Same for Chesapeake, just around the same time.”

Both Matador Resources Co. and Chesapeake Energy Corp. are top components of the SPDR S&P Oil & Gas Exploration & Production ETF, with Matador among the top 10 holdings.

Mass exit

Another bullish signal for this contrarian investor was the other side of the insider buying coin.

“At the same time, we saw retail money pouring out massively,” he said.

For buyers of this five-year autocallable product, what really matters is the short-term horizon, he said.

“If you get called chances are it will be early, in this case a year from now. It’s not a bad outcome. You close your position with a double-digit return,” he said.

“Both funds have experienced deep price drops. Investors remain nervous about the two sectors, he said.

“I think the timing is favorable. The call in one year is the most probable scenario because prices are unlikely to be lower.”

Short duration

For now, insiders are required to hold their positions for at least six months, he noted.

“July will be a test. We’ll see what they will do at that point. But I don’t anticipate a lot of selling. Insiders tend to buy what they can hold for a while and prices are still low.

The gold miners ETF presented similar characteristics as the energy fund.

“Both are fundamentally undervalued. Both saw huge insider buying and heavy outflows,” he said.

The VanEck Vectors Gold Miners ETF, also an equity fund, tracks the performance of companies involved in the gold mining industry. It is listed on the NYSE Arca under the ticker “GDX.”

After rallying from a September low, the fund has now lost 13% from its February high.

“If you look at the five-year chart, you’ll see that we’re still at depressed levels. Current valuations are quite lower than the higher levels,” he said.

The current price is 35% lower than the five-year high of August 2016.

Out of the spotlight

Given his analysis of the chart and flows, this portfolio manager was relatively positive about this structured product.

“The worst-of introduces some uncertainty, and it’s hard to predict what your exposure will be, meaning, which one will be the worst-of,” he said.

“Either way, I’m not too concerned.

“There’s a pretty high chance that they will both be higher in a year.”

To support his view, Kaplan combines some of the contrarian signals he previously described, such as using outflows in relation to prices to detect changes in market sentiment.

“In 2019 GDX had the biggest net outflow on record. Yet the fund was trading sideways,” he said.

“Usually people get out when they’re scared, not when the stock is going nowhere.

“It tells me that people are impatient. They’re probably seeking the usual suspects...the Amazon or the Google. “They seek the names they’re familiar with, the names you can talk about with people at the office.”

The note was more contrarian in nature.

“They picked two unpopular funds for this product, and that’s a good thing,” he said.

The notes will be guaranteed by Citigroup Inc.

Citigroup Global Markets Inc. is the underwriter.

The notes will price on May 28.

The Cusip number is 17326YC46.

© 2015 Prospect News.
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