tactical trader

Last month SG Warrants launched their new Football 2006 Tracker (SGWC) warrant and as I’ve been doing a lot of work on warrants recently I decided to take a look.

The warrant gives exposure to a basket of nine companies that SG have selected as likely to benefit from this year’s World Cup tournament which runs from June 9th to July 9th in Germany. The selection criteria were simple: the company must have outperformed in four out of the last five major football tournaments (World Cup ’98 and 2002, Euro ’96, 2000 and 2004) and must have a market capitalisation of more than 3 billion Euros.

The stocks that made it into the basket are:

• Accor
  Hotels and leisure (France)

• Adidas-Saloman
  Clothing and footwear and official FIFA partner (Germany)

• Beiersdorf
  Male grooming products (Germany)

• Continental
  Auto components and official FIFA sponsor (Germany)

• Danone
  Food products (France)

• Heineken
  Beverages and official FIFA partner (Netherlands)

• Nestlé
  Food products (Switzerland)

• PPR
  Sports retailer (France)

• Puma
  Clothing and footwear (Germany)

According to SG the average increase of the basket of stocks in the three months leading up to the last five football tournaments was 14.9%.

The warrant expires on July 31st 2006, is leveraged to give 2x the gains or losses of the underlying basket of shares and, more like a listed CFD than a covered warrant, it has a built in stop loss if the basket falls by 30% or more.

In simple terms then, buying this warrant would mean risking a 30% fall in order to have the chance of making 30% (based on double the average 14.9% historical gains).

My own research focused on two main questions: how well did the underlying stocks really perform during past football tournaments and what is the technical picture for the stocks in the basket?

My conclusions were that while there was a seasonal up trend in the stocks in the basket from the start of the year until the end of May (or mid-June), the rise in price could not be attributed to a football tournament. A perfect example being Continental: people don’t rush out and buy tyres or exhausts during football tournaments, Continental are only relevant this year because they are a World Cup sponsor, and yet their stock price has increased in the run up to previous tournaments.

There is no doubt that companies directly related to football will benefit. For example during the Euro 2004 tournament Adidas sold six million copies of the official match ball – six million Similarly, fans with more money than sense go out and buy boots and football shirts either in the hope they will magically gain some of the skill of their idols on the pitch or, in the case of far too many middle-aged men, they will wear them when they go out in the hope they will look more sporty, even though their rather large beer bellies give the game away

The basic technical picture shows that the majority of stocks in the basket are in up trends or sideways consolidation, with Nestlé being the only stock in a downtrend. A potential problem is that a number of stocks are also near long term highs, with a risk of reversal in the shorter term.

As a result I won’t be adding SGWC to our portfolio as we already have exposure to the German and French markets, but I will be tracking it over the next 5 months until expiry to see how well it performs. Of course as always you should do your own research, and if you reach a different conclusion let me know!

While there is evidence of seasonality that should see the warrant increase in value – you really need to ask yourself “Do I want shorter term (5 month) exposure to these nine companies?” If yes, then this warrant provides a low cost (only one commission) leveraged way of getting the exposure.

As most traders are men, and it would seem that most men are football fans, it seems to me that SG is trying to capitalise on football fanaticism to sell some warrants. If you want to make a profit from the World Cup though, you’d probably be better off looking at bets on the games themselves.