Credit Suisse’s PLUS on VanEck Vectors Oil Services ETF show nearly unprecedented bargain

By Emma Trincal

New York, March 13 – Credit Suisse AG, London Branch’s 0% Performance Leveraged Upside Securities due June 17, 2021 linked to the VanEck Vectors Oil Services ETF offer a strong value proposition for short-term investors who are willing to take the risk associated with a beaten up sector, said Steven Jon Kaplan, founder and portfolio manager of TrueContrarian Investments.

If the ETF return is positive, the payout at maturity will be par of $10 plus triple the ETF return, subject to a maximum payment of $14.05 per PLUS, according to a 424B2 filing with the Securities and Exchange Commission.

Investors will lose 1% for each 1% decline.

Deep discount

“Opportunities are out there. The question is which is the best one. There are a lot of cheap stocks, which provide great value,” said Kaplan.

The underlying fund was a case in point.

“This is one of the most depressed securities. It’s presumably a good choice if you’re looking for deep value,” he said.

“At $4 a share, you don’t really need to have a barrier or buffer. It’s so collapsed. Hard to imagine it could go much lower. And even if the price increase is small, the 3x leverage should give you a pretty good return.”

The only “downside” is the cap, he said. But the deal comes at the very right time, he noted.

“It starts at a very low price. Fifteen months is the typical period of time for a rebound.

“It matures in June and energy tends to pick up in the summer.

“So, when you take into account the fact that it starts just when the price is plummeting, that it’s long enough to give the share price enough time to rally and that it matures in the summer, a good period for energy stocks, you can say that timing is really, really good on this one.”

Surging volatility

The top two holdings in the ETF are Schlumberger Ltd. and Halliburton Co., which together make for 30% of the portfolio. The ETF tracks the stocks of companies involved in oil services, such as oil equipment, oil services, or oil drilling. The fund includes small and medium-capitalization companies. The smaller market capitalization makes the underlier more volatile than a large-cap energy fund such as Energy Select Sector SPDR, although the entire sector has been shaken by the oil shock and stock market rout.

Some of the components of OIH are at multi-year low prices, he said, referring with “OIH” to the ticker symbol of the underlying ETF, which is listed on the NYSE Arca.

“Many of those stocks are at their lowest in 20 years, some since the last 30 or even 40 years. It’s a very unusual circumstance,” he said.

“The share price of OIH is now at $4.20. Its high in 2018 was at $28.62. If you go back to 2014, the high was $50.86 in June.

“It’s more than a 90% drop.”

The ETF share price closed at $4.46 on Friday.

Buyers in the know

Kaplan is bullish on energy, but it’s not always clear how long it will take for the sector to recover.

One strong indication of faith in the sector among some of the most influential investors is the recent activity from insiders, he said.

“We’re seeing huge insider buying especially after last Monday’s crash in oil. They’re setting all kinds of record buys.

“Of course, they can’t push up the stock prices when you have many million investors going the other way.

“But insider buying is a pretty solid sign of confidence and overall bullishness.”

Leverage versus cap

The main advantage of the structure is the high leverage. Pricing it requires concessions, he noted.

Investors face a trade-off, which they must consider before buying the notes as it would be the case with any other investment, he added.

“You could be long the shares and avoid the cap. But the note at least gives you the leverage and increases the odds of a positive return over a short period of time,” he said.

“Nobody likes to have a cap. But the leverage is a very positive feature, especially three times and over a short tenor.

“It would be ideal to get a more generous cap. But they probably wouldn’t be able to offer three to one.”

Other solutions may include less leverage with a higher cap or possibly one-to-one with a buffer.

“There are a lot of possibilities.

“It all depends on your outlook. This one is a short-term, moderately bullish note. It has no buffer or barrier. But the pricing is at such a low point that aggressive investors may be able to tolerate the full downside exposure.”

Credit Suisse Securities (USA) LLC is the agent, with Morgan Stanley Wealth Management handling distribution.

The notes will settle March 18.

The Cusip number is 22550V398.

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