There is a clear favorite among market-making professionals, based on the "order flow" from their big-money-fund clientele: it is Linkedin Corporation (NYSE:LNKD). Those clients are the ones with the money-muscle to make coming prices move.
For those that may not have been watching this interest-set regularly, here is what has been happening to the prices of the principal players:
And here is where those paths have left them (and several other set members) in the minds-eye of the market-making community as to their future price prospects:
(used with permission)
This map of forecast likely price change extremes puts better buys down and to the right, and anything troubling above the dotted diagonal line. Truly scary items approach the caution and stop-light colors, and anything in the green sees five times the upside potential as drawdown exposure. LNKD is at point , Facebook (NASDAQ:FB) at .
Beside the plain forecasts there exists a question of credibility; anyone can (and many do) make guesses about the future. Where value intermediates, like EPS and size and share of market revenues are concerned, there are many qualified and well versed professional appraisers. When it comes to converting all that intelligence into specific prices in the next few months few, if any, can do it as well as the pros that facilitate the volume trades that move markets.
But even they can only cover so much ground. Time and capital bound us all, and they seek to apply theirs where it pays best. So we watch carefully to see how well their forecasts of the past have turned out in the following 3 months. This table shows the better ones of the colorful map above:
For those new to this analysis, the sell targets are the top of the range forecasts, worst-case drawdowns are an average experience of implied forecasts during the last five years' having a balance of upside to downside like today's. That balance is expressed in the Range Index, which tells that percentage of the forecast range (from low to high) which lies below the Price Now. The win odds are the proportion of those similar prior forecasts that produced profitable experiences in the 3 months subsequent to the forecast, usually by reaching sell targets.
That R~R ratio is a comparison of the sizes of Sell Target prospect and Worst-Case price drawdown experiences.
Investors may have various reasons for committing capital to information network stocks. Usually wealth-building is a principal one. The difference in opportunity for gains is highlighted in the last two lines of the table, where the average of these better 28 stocks is paralleled by a passive investment market average in SPY, the SPDR S&P500 ETF.
SPY currently is priced in an expectations range that offers an +8.3% upside price change prospect, while the average Information Network stock in this set posits an +18% potential. The other side of the coin is a past experience, when these stocks have been priced relative to expectations as they are now, of worst-case drawdowns averaging -11.4%. The comparable experience for SPY is -4.8%, less than half of the stocks' average.
But the comparison of potential rewards with past-experience risks produces almost twice as much upside as drawdown, a ratio of 1.9 for stocks, whereas SPY offers a lower, but still good, ratio of 1.7. For the ambitious wealth-builder that is insensitive to temporary setbacks, the stocks have considerable appeal. But it should always be the investor's call, its his capital at risk, and he knows his circumstances and desires best.
Averages are one thing, specifics another. The SPY benchmark provides a means of seeing how well or poorly each stock is currently priced in comparison to a passive investment approach. At the start of this article, LNKD was tagged as an outstanding choice, not only of the past, but at present. Here its return outlook, at +19.6% is more than twice the "market proxy" of SPY, but its past drawdowns at -3.4% are smaller than the passive investment norm.
LNKD's business model, built around business personal relationship networking, is a much stronger concept than the FB notion of mere acquaintances communications.
On another front LNKD, at this Range Index price level, has produced gains in 61 out of 62 time-disciplined holdings. SPY has had an enviable record, at profits 81% of its 257 prior experiences measured the same way, but seriously lags behind LNKD's reliability.
LNKD has had great gains over the past two years, but the expectations of market professionals and their clients have kept up well. Current minor pullback provides a good acquisition opportunity at attractive risk-reward tradeoff.
Going down the list one can make similar comparisons, not only one stock vs. SPY, but stock vs, stock to find where the most appeal appears, and conversely, where concerns may arise. This is a useful periodic exercise for any active investor. It may only be done monthly, or weekly. Aggressive investors may maintain daily surveillance, watching for sell target achievers and reinvestment candidates.
Please keep in mind that as prices change daily, so may MM forecast expectations. This is rightfully a dynamic game. What may appear to be a shoo-in best buy today may not continue to be so in a week, or even in a few days. And what counts is an appraisal at the time action is called for.
Make the tradeoffs between these dimensions which are most meaningful to you, with our best wishes for satisfying outcomes. See you again in 3 months or sooner.
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.