Volatility Returning To Global Markets

Executive Summary

• As inflation fears continue to ramp up and earnings season subsides, volatility has returned to global equity markets.
• We feature three firms with important earnings-related corporate events that traders should monitor.
  • An energy name that has a merger in progress.
  • A financials company that recently hiked its dividend.
  • A European retailer that experienced positive cash flow impacts from the pandemic.

Use Of Cash

The emerging theme is, “what will firms do with capital now that lending standards are easing and companies are ripe with cash?” M&A, returning value to shareholders, and rising wages are three routes corporate managers can take. We hear headline after headline regarding rising low-end wages, but investors should monitor other uses of cash as we exit earnings season.

Earnings Outliers

We feature one company as an earnings outlier this week.

Extraction Oil & Gas (OTC:XOGAQ) Inc (NASDAQ:XOG) is a Colorado-based oil extraction small cap in the energy sector. The stock has surged this year after filing Chapter 11 bankruptcy in 2020. Since returning to the trading scene, XOG shares have gone from near $20 in January to above $50 at the high last week. Money has been moving into the small cap and energy spaces over the last year. There is more happening at the micro-level with XOG, however.

Bonanza Merger

On May 10, it was announced that Bonanza Creek (NYSE:BCEI) and XOG would combine in a $2.6-billion merger of equals to create Civitas Resources. The press release highlighted the new entity being a leader in responsible energy production for Colorado and the state’s first net-zero oil & gas producer.

Outlier Analysis

• March 19 - Wall Street Horizon set a tentative Q2 earnings date of May 10 After Market for XOG based on its trend of reporting results from May 2-May 11.
• May 10 - XOG released a press release stating, “Given this merger transaction and the residual fresh start accounting requirements associated with Extraction's recent emergence from Chapter 11, Extraction will be delaying its earnings announcement to May 24, 2021.” As a result, we updated the Q2 earnings date to May 24 Unspecified Confirmed.

Figure 1: XOG Stock Price History (YTD)

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Capital Southwest Corporation (NASDAQ:CSWC) is a Texas-based asset management micro-cap in the financials sector. CSWC specializes in middle market lending to support the acquisition and growth of firms sized between $5 million and $25 million.

Price Action

Shares of CSWC have more than doubled from late October 2020 as investors shifted from large cap growth and tech stocks to small cap value and financials. The chart below illustrates investors’ interest. With some recent market volatility, CWSC is still near its 52-week high (and all-time) with spikes in volume in November and in early February.

Dividend Hike

The early February price and volume activity are interesting as they coincide with the February 1 Q3 earnings announcement. Capital Southwest announced a dividend increase when results were released, pleasing shareholders. An earlier than expected Q4 earnings announcement might portend more important news.

Outlier Analysis

• Feb. 2 - Wall Street Horizon set a tentative Q4 earnings date of June 3 After Market based on its reporting trend of issuing results from May 31 to June 4, usually on Mondays.
• May 17 - CSWC issued a press release stating Q4 and Fiscal Year 2021 results would be reported on May 25 after market.
• Wall Street Horizon promptly notified clients of the change. This change created a high z-score of -3.17.
• A conference call also takes place on Wednesday, May 26 at 11:00 A.M. EDT.

Figure 2: CSWC Stock Price History (1-Year)

Earnings Date Revision

A Luxembourg-based retailer listed on the UK’s FTSE 100 is featured as an Earnings Revision this week.

B&M European Value Retail SA (LON:BMEB) is a £5.7 mid-cap general merchandise discount retailer and claims to be UK’s leading variety goods value store. The firm was founded in 1978 and its products include housewares, DIY electrical items, toys, and pet products. B&M’s fiscal year runs from April through March, so the upcoming report will provide a glimpse at what was a tough period for most retailers in Europe due to the pandemic, but management noted positive impacts due to consumers stockpiling goods in mid-March 2020 which continued through the year.

COVID’s Positive Business Impact

The most recent earnings report which covered the three months ending Dec. 26, 2020, featured 22.5% sales growth.⁵ Management also raised EBITDA guidance for FY21 to be in the range of £590 million to £620 million, an increase from £540 million to £570 million. Expectations are likely elevated for B&M as the stock price remains just below its February peak. Uncertainty regarding earnings consistency is also high, according to management, who said there are significant forecasting challenges due to consumers stocking up on supplies at the onset of pandemic and then restrictions hampering operations.

Price Action

Shares of B&M are treading water after a surge from just above $200 at the low in March 2020 to a February 2021 peak above $600 (note those figures are in USD). Volume and volatility have been light recently, so the upcoming earnings release could be the next catalyst for a significant move.

Revision Analysis

• Dec. 22 - BMEB confirmed on their website calendar they would be reporting H221 on May 26, 2021.
• Jan. 2 - While conducting routine research, Wall Street Horizon analysts found a calendar date change to June 3 confirmed.
• Investors should be prepared for potentially unusual news to be reported within the earnings report that is later than first scheduled.

Figure 3: BMEB Stock Price History (1-year)

Conclusion

Global stock markets have taken a breather after one of the best 12-month stretches in history. Virtually all equity indices featured massive gains from late March 2020 through Q1 2021. As the rally has petered out, or at least paused, traders must be keenly aware of risk management strategies. Knowing when key corporate events take place, and which could draw volatility, is critical to a portfolio manager’s trading strategy. Wall Street Horizon provides the most accurate and up-to-date intel.

Written By: Christine Short