Is Telefonica Ready To Bounce Back?

With shares of Telefonica (NYSE:TEF) trading around $16, is TEF an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let's analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Telefonica provides fixed and mobile communication services primarily in Europe and Latin America. The company offers mobile voice; value-added mobile data and Internet; wholesale, corporate, roaming, and fixed wireless; and trunking and paging services, as well as mobile payment solutions. Its fixed telecommunication services include PSTN lines; ISDN accesses; public telephone services; local, domestic, and international long distance and fixed-to-mobile communications services; video telephony; supplementary and business-oriented value-added services; intelligent network services; leasing and sale of handset equipment; and corporate communication and telephony information services.

Telefonica's third-quarter net profit fell 21 percent and revenue fell 1o percent, but Telefonica says it's beginning to turn around its operations in Spain. Europe's second-largest telecom company cited weaker Latin American currencies versus the euro as part of the problem, as sales in Latin America rose 11 percent in their own currencies but dropped 6.8 percent in euros. Telefonica executives were optimistic that the Spanish economy is beginning to bounce back, and revenue in the company's Spanish unit dropped less than it has in the two previous quarters, according to The Wall Street Journal.

T = Technicals on the Stock Chart are Strong

Telefonica stock has been surging higher after hitting lows last year. The stock is currently trading near highs for the year and looks poised to continue. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Telefonica is trading above its rising key averages which signal neutral to bullish price action in the near-term.

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Telefonica options may help determine if investors are bullish, neutral, or bearish.

	Top 10 Penny Companies To Invest In Right Now Implied Volatility (IV)	30-Day IV Percentile	90-Day IV Percentile
Telefonica Options	32.12%	93%	90%

What does this mean? This means that investors or traders are buying a very significant amount of call and put options contracts, as compared to the last 30 and 90 trading days.

	Put IV Skew	Call IV Skew
December Options	Flat	Average
January Options	Flat	Average

As of today, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a very significant amount of call and put option contracts and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Mixed Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Telefonica’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Telefonica look like and more importantly, how did the markets like these numbers?

	2013 Q3	2013 Q2	2013 Q1	2012 Q4
Earnings Growth (Y-O-Y)	N/A	-9.19%	20.33%	-80.63%
Revenue Growth (Y-O-Y)	N/A	-2.68%	-12.15%	-1.61%
Earnings Reaction	2.28%*	2.89%	N/A	N/A

Telefonica has seen  mixed earnings and decreasing revenue figures over the last four quarters. From these numbers, the markets have been optimistic about Telefonica’s recent earnings announcements.

* As of this writing

P = Excellent Relative Performance Versus Peers and Sector

How has Telefonica stock done relative to its peers, Telecom Italia (NYSE:TI), America Movil (NYSE:AMX), Vodafone (NASDAQ:VOD), and sector?

	Telefonica	Telecom Italia	American Movil	Vodafone	Sector
Year-to-Date Return	23.13%	0.11%	-9.16%	46.09%	16.04%

Telefonica has been a relative performance leader, year-to-date.

Conclusion

Telefonica provides fixed and mobile communication services primarily in Europe and Latin America. The company reported earnings that fell; however, the company is beginning to see a turnaround. The stock has been surging higher after hitting lows last year and is currently trading near highs for the year. Over the last four quarters, earnings have been mixed while revenues have been decreasing, but investors remain optimistic about the company. Relative to its peers and sector, Telefonica has been a relative performance leader year-to-date. Look for Telefonica to OUTPERFORM.