Isn't only a great expected investment return on Halliburton (NYSE:HAL) enough? NO.
Every investment needs a solid understanding of its economic possibilities, and a thorough analysis of its fundamentals can provide this. As a CFA charterholder from the early days of the CFA Institute's organization (charter 953, now there are over 100,000) I am keenly aware of this prerequisite.
But investment performance is almost always measured by the progress of the investor's wealth, both as to its growth rate and its irregularity. They come about as a result of the market's appraisal of what seems to be an appropriate price, at each point in time, for every investment. That makes an analysis, which only studies the fundamentals disturbingly incomplete, since annual price fluctuations typically are several times each investment's fundamental growth rate.
Yet much of what passes for investment guidance relies on the most cursory assertions of the relationship of past years' prices to what corporate management chooses to report (blessed by auditors that they hire) as what they want the public to believe might have influenced those earlier prices. Is this being cynical? No, it is just a realistic recognition of human behavior, given the current structure of legal motivations.
Instead, we believe that a sound fundamental analysis needs to be made complete by a contemporary evaluation of what prices realistically may be expected. Expected not only from the corporate fundamentals, but also in light of the attitudes of observers willing to involve themselves (and their capital) in the market's essential process of "price discovery."
To that end we observe the behavior of market participants who most likely have developed a thorough understanding of each investment's fundamentals and now must decide how they are likely to be translated in terms of price. Fear of losing capital in the participation, and greed to enlarge their capital by the same means, defines a window of price possibilities. The comparative process is disciplined by the fact that many alternatives exist that must meet the same test of "what are the realistic future price possibilities here?"
Our pursuit of these price expectations is by means of examining how market-makers [MMs] behave in the conduct of their highly-rewarding role. There may be other ways to get qualified forecasts, but for us, the MMs' estimates have extensive real-life ex-ante results demonstrating their abilities.
The current case study of Halliburton
On another day some other stock will push HAL off its current "top-dog" (by our selection preferences) energy investment candidate position. But here is how it is seen now:
To explain the table's column heads: Sell targets are the % rise from Price Now to top of the forecast range. Drawdowns average the worst end-of-day price comparison with forecast day price during each position holding, among all similar Range Index experiences in the sample. The Range Index measures that % of the forecast range lying below the current price. Win Odds are the % of forecasts reaching targets, plus those that don't but, 3 months later, are at a higher price than at time of forecast. Payoffs are the average % price changes from all similar prior forecasts. Market Days Held reflects early closeouts of achieved sell targets. Annual rates recognize 252-market-day years. Sample size counts number of all forecast days available in the past 5 years, and the number of days therein with similar Range Indexes.
These fourteen stocks are screened out of more than ten times as many energy industry stocks followed on a daily basis. Requirements are that we have a sufficient number of histories of forecasts similar to today's, where a standard time-efficient strategy has produced profits in at least 6 out of 8 commitments. The intent is to identify those securities where MMs have demonstrated productive insights into likely future price behavior.
The averages of their prior performances under that standard investment management strategy is summarized below the company-by-company detail lines.
There is no guarantee that future prices will be similar to the past, but humans often formulate habits that are repetitive where surroundings seem familiar, and it is humans that move market prices.
For perspective four other summary lines indicate parallel dimensions on the day, a) for the best of the oilfield services sub-group, b) the entire oilfield services sub-group, c) the entire energy producing sector, and d) the whole measurable population of over 2,000 stocks, ETFs, REITs, and indexes with forecasts every day. Over 3,000 issues examined on this particular day exclude many where sufficient information to generate forecasts may be lacking.
In general, the better energy sector stocks have produced significantly higher annual rates of return than the broad population, but the better oil service candidates (*) have done even more. In fact, the energy sector at large now appears less productive than the overall forecast population, in terms of prior annual rates of return from present-day forecast balances between upside and downside prospects.
Now, how about Halliburton?
This stock has been an institutional favorite for decades, partly because it has cultured a disciplined and effective managerial contingent. In addition to managing the USA's national political affairs from a #2 position for a few critical years, HAL management has maintained a dominant position in a highly competitive, technologically evolving field that is an essential and major part of the economies of every important nation on earth.
Advances in extractive technology reinforce its competitive position and enhance its appeal to the 900+ institutions and funds holding 82% of its outstanding stock and float. The active and liquid market for its stock sees more than 5% turnover per week involving some $5 billion in share values.
(used with permission)
Please note that this is not a typical high-low-close chart looking back in time at past prices. Instead it is a log of forward-looking price range forecasts, represented by the vertical lines, made live in real time when HAL's contemporary price was at the heavy dot in the forecast range. The advances in MM forecasts, keeping pace with its market price quotes are a sign of its continuing strength.
What makes the MM forecasts viable is that all of the available fundamental information on HAL, and its competitors, has been gathered by the world-wide, 24x7x365 information-capturing systems of the market makers, examined by their extensive research staffs, and passed on to the volume trading desks where block traders and proprietary traders monitor the minute by minute "order flow" from their big-money hedge fund, mutual fund, and other institutional clients.
This all goes into the judgments of the MM traders and is reflected in their self-protective actions, hedging their firm's capital that often must be put at risk to competitively "fill" client trade orders.
Summary & conclusion on HAL:
Even though the forecasts see as much price fluctuation downwards as up (-8% vs. +8%), its past history of maximum price drawdowns of -6% make the stock a strong defensive investment candidate. At a time when considerable value questions are present in markets at large, and demonstrated prior price performances of hundreds, even thousands of stocks at times of outlooks like today's are well below recent performances, HAL's 91 out of each 100 in profitable stock price results, and target achievements in 5-6 week holding periods that compound to triple-digit annual rates of gain, are compellingly competitive in comparison with most equity investment alternatives.
Additional Disclosure: The author has an investment interest in the website blockdesk.com which, while not yet open to the public, is in conversion from being a delivery medium of information to institutional investors to a new life of providing similar help to do-it-yourself investors. Both brief and extended-time subscriptions for single or multiple issue inquiries should be at quite reasonable and manageable costs for individuals. Announcement of its opening is hoped for in the 4th quarter of this year.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.