UBS’ $3.69 million capped buffer Gears on stock basket offer tech bet with limited upside

By Emma Trincal

New York, Nov. 4 – UBS AG London Branch’s $3.69 million of 0% capped buffer Gears due Oct. 31, 2024 linked to an equally weighted basket of 10 tech stocks give investors unique exposure to a subset of the technology sector with a strong track record, advisers said. But they objected to the “low cap,” given the high volatility of the of stock picks.

The basket consists of the common stocks of Arista Networks, Inc., CrowdStrike Holdings, Inc., CyberArk Software Ltd., DocuSign, Inc., Fortinet, Inc., Global Payments Inc., Mastercard Inc., Palo Alto Networks, Inc., Synchrony Financial and VMware, Inc., according to a 424B2 filing with the Securities and Exchange Commission.

If the basket finishes at or above its initial level, the payout at maturity will be par plus double the basket gain, up to a maximum return of par plus 33.5%.

If the basket falls by no more than 10%, the payout will be par.

Otherwise, investors will lose 1% for each 1% decline of the basket beyond the 10% buffer.

Go long

“The potential gain is really modest, and the buffer is not big either,” said a buysider.

“The leverage is nice. But these stocks have higher upside potential than just 10% a year.”

The 33.5% cap over three years represent an annualized compounded return of 10.11%.

“You’re only going to outperform on the downside. You may outperform on the upside but it’s unlikely.

The basket would have to be up only moderately. If you’re bullish, you’re better off buying the stocks outright with no cap.”

Unique basket

Steve Doucette, financial adviser at Proctor Financial, also objected to the cap.

“I would have to do a lot of due diligence to figure out if this is a reasonable basket. Cybersecurity is our biggest threat so I’m sure some of those stocks have some potential for growth,” he said.

All stocks in the basket are technology stocks except for Synchrony Financial, a consumer financial services company. But the companies represented in the small portfolio are not picked at random as they are part of specific segments of the technology sector, he noted. Those areas are cloud technology (Arista, CrowdStrike, VMware), cybersecurity (Palo Alto Networks, Fortinet and CyberArk Software), digital payments (Mastercard, Global Payments) and electronic signatures (DocuSign).

“It’s amazing how they can come up with a basket of 10 names picked in different subsets of one sector. It’s actually pretty unique,” he said.

High volatility

“You’d have to believe in this sub-sector. But if you believe in it, why do you want to cap yourself?”

Doucette expressed doubts about the usefulness of the buffer.

“A 10% buffer might pay off. But who knows? These are very volatile stocks.”

Implied volatilities range from 30.73% for Mastercard to 44.62% for CrowdStrike. Six out of the 10 basket components have an implied volatility close to 45% or greater. Those levels sharply contrast with the implied volatility of the technology sector as measured by the Select Sector SPDR Technology ETF, with an implied volatility of 20.6%.

High-flyers

“So, you have a sideways view, I guess. You believe this basket is not going up more than 5% a year and you’re willing to cap yourself at 10% even though any of those stocks can go through the roof. Weird,” he said.

The basket has returned 41.4% over the past year. Arista, Fortinet and Palo Alto Networks have more than doubled during the period.

The rationale behind the trade was not clear to this adviser.

“What are you betting on?

“If you like the sub-sector, why wouldn’t you want to be long the stocks without a cap?”

Doucette said he did not object to the structure, only to the limit on the gains.

“There’s no coupon. It’s not an income play. That’s okay because this is not something I would do as an autocall anyway. The volatility is too great.”

“I don’t mind the leveraged structure. But the cap is not attractive.

“It’s hard to get excited about it.”

High-growth sector

Matt Medeiros, president and chief executive of the Institute for Wealth Management, expressed a similar disappointment about the upside potential.

“I’m familiar with this sector and with most of those stocks,” he said.

The main theme around the choice of the 10 stocks was business automation, he added.

“As a business continues to grow, it needs ways to optimize the performance. Anytime you start doing digital transactions, you need to authenticate the process and make it efficient, so you won’t get hacked.

“This basket revolves around that theme. It’s about secure business transactions. Document storage, cybersecurity, the cloud. All these different functions are part of a process designed to engage your clients by improving the safety of your business.

“But the cap is low. I like the idea. I don’t like the cap.

“If you’re going to take equity risk with tech stocks, you can’t have a low cap and the 10% buffer is not enough.

“I like the leverage. But if I wanted to buy that type of note, I would sacrifice the leverage for a higher cap.

UBS Financial Services Inc. and UBS Investment Bank are the agents.

The notes settled on Oct. 29.

The Cusip number is 90285B714.

The fee is 2.5%.

© 2015 Prospect News.
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