Barclays’14-month Accelerated Return Notes on S&P Oil & Gas are timely, contrarian says

By Emma Trincal

New York, Nov. 9 – Barclays Bank plc’s 0% Accelerated Return Notes due January 2020 linked to the S&P Oil & Gas Exploration & Production Select Industry index should appeal to investors looking for value when making an investment, said Steven Jon Kaplan, founder and portfolio manager of TrueContrarian Investments.

“This is an interesting note based on a sector that’s out of favor right now,” he said.

The payout at maturity will be par of $10 plus triple any index gain, up to a maximum return of 24% to 28% with the exact cap will be set at pricing, according to a 424B2 filed with the Securities and Exchange Commission.

Investors will be exposed to any losses.

Price is protection

Kaplan looks at valuations over longer periods than the term of the notes. He said he was not overly concerned with the full downside exposure of the notes since the price appeared to be right in his analysis.

“If you look at the underlying from a technical analysis standpoint, you can see the timing is quite good.

“You’re probably better off buying an attractively priced and out-of-favor asset than buying at the peak with a buffer,” he said.

Bear talk

On Thursday, U.S. crude oil entered a bear market officially, closing down 21% from its October high.

Gloomy headlines ensued, which Kaplan, a contrarian investor, said may be interpreted as a buying signal.

“The headlines talk about this bear market in oil and people are getting scared. If this note prices at the end of the month, you may see an even better bargain,” he said.

The underlying index tracks the equity performance of the oil and gas exploration and production segment of the S&P Total Market index, a sector highly correlated with oil prices.

“The media gets carried away with the term ‘bear market’ as soon as they see a 20% decline from the recent high. But it’s really misleading. You have to go back over longer periods of time to determine a trend. If the long-term trend shows higher lows, you’re not in a bear market. You’re actually in a bull market. What we just had is a correction,” he said.

A correction typically is defined as a market decline of at least 10% while a 20% drop will be considered a bear market.

These definitions in percentage of market decline are “arbitrary,” and may “hide the real picture,” he said.

Five-year chart

Kaplan illustrated his view using the exchange-traded fund that replicates the performance of the underlying index.

He observed the chart of the SPDR S&P Oil & Gas Exploration & Production Select Industry ETF over the past five years.

On June 2014, the share price hit its highest point for the period at $80.25.

On Friday, the ETF closed at $36.39 a share.

“Today we’re still at considerably lower levels than the June 2014 high, down about 55%. But the big bear market took place about three years ago. Since then, we’ve been on a slow recovery path,” he said.

Indeed, from the top in June 2014 to the all-time low of the period in February 2016 at $21.57, the ETF plummeted by 73%.

“That was the bear market and if you had to pick a good time to sell, June 2014 was the time. Bear markets rarely catch people off guard. There were signs that were visible then. You had a series of higher highs for a couple of years before, the opposite of what we’re looking at now,” he noted.

Since then, the chart has shown some choppiness. But the long-term trend has been nothing short of bullish, he said.

Lows are rising

Since the beginning of 2016, the ETF has regularly been setting higher lows and such pattern is still holding today, he noted.

After the $21.57 low of February 2016, the share price reached a fresh high eight months later followed by a new low of $28.70 in August 2017. That last point was already 33% higher than the February 2016 mark.

The fund recovered later last year, then hit a new high as most of the market did in January. In February, the share price fell to a new low at $30.82, a 23% drop in less than a month.

“Technically a 23% drop in a couple of weeks is a bear market. But if you look more closely, all these lows have been steadily increasing year after year,” he said.

“Once again we hit in February a higher low than the previous one in August last year,” he said.

“As long as you see higher lows, the trend is bullish, not bearish.

“In fact, someone buying in this year in February at the bottom would have made a neat 50% gain by simply holding the position until July when the fund reached another top at $45.45.”

The share price fell again late October to its second low for the year to date at $34.02.

“Same pattern here: our most recent low is higher than the February low, which itself was higher than the low of August 2017 and so on, back to the lowest low of February 2016,” he said.

Checking the boxes

“From a technical analysis standpoint, I like those notes,” he said,

“It’s in a long-term bull trajectory and you’re getting it at a discount.

“I like buying assets that are out of favor and slightly lower as long as I see a long-term pattern of higher lows, which is present here. It’s been happening for almost three years.

The buffer or barrier was missing. But Kaplan said he was comfortable with the set up on the chart.

“It’s a short-term trade but at these levels it’s a very good time to participate,” he said.

“A small gain will be increased. What you miss out are potential big gains. If you have a very bullish view you should probably not do this trade although the cap isn’t bad.

“It’s one of the better notes I’ve seen in a while.”

BofA Merrill Lynch is the underwriter.

The notes will price in November and settle in December.

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