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Day one: trading QBE

As my colleague Evan Lucas wrote on Friday, QBE has been placed in a trading halt pending an update on its North America assets.

The fact that the insurance firm sourced over 40% of its revenue in 2012 from this geography is important, so the size of the downgrade will determine the magnitude of the EPS downgrades by analysts.

As things stand, the consensus price target is $16.89 and clearly this is looking very optimistic, with investment houses like BOA/ML recently putting this stock on its top pick-list. JP Morgan is one of the more bearish houses, putting out an out-of-consensus ‘sell’ recommendation, with a price target of $14.50, and this is probably looking like the better call right now.

Fundamentally, the stock has seen modest P/E expansion this year, rising to a consensus twelve-month P/E (price to earnings ratio) of 12.47x, which is a 12% premium to the five-year average. This is interesting because while bond yields have been rising in the US (an asset class QBE generally has a strong correlation with), and US earnings have been looking more compelling, we haven’t seen consensus EPS upgrades for this name for some time. It is also worth pointing out this is not the first time in the last few years (providing speculation is correct) we have seen a change to its earnings guidance, and it’s this issue that causes a lack of trust from the investment community.

Technically the stock is consolidating after a good run up the October lows, but it’s clear that momentum was falling into Friday’s trading halt. We’ve already seen the signal line fall below the MACD and stochastics are falling heavily.

Given we simply don’t know what the announcement is, I can’t put out any ideas  just yet and will wait to get a clearer idea around both the technicals and of course fundamentals. However, it’s interesting to see that short interest is fairly low in this name at $15 million, so the prospect of a spike in short interest from traders is high.

79% of all open positions held by IG’s clients are short, so clearly sentiment towards this name from a retail perspective has fallen away of late.


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