What Are You Afraid Of?

 |  Includes: CRM, FAS, JAZZ, PCLN, SPY
by: Peter F. Way, CFA

Executive summary:

  • Today's best 30 equity choices for wealth-building in the next 3 months are presented.
  • They include CRM, PCLN, FAS, JAZZ, FSLR, among other diversified buy candidates.
  • Best choices are defined by the future price forecasts implied by market-makers' hedges to protect their firm capital, put at risk to get big-money client's trades filled.
  • Choices are compared with a market-average forecast as represented by SPDR S&P500 ETF (NYSEARCA:SPY), and with the average of 2500+ other equities forecasts.


What are you afraid of?

"Losing money we have at risk", they all answered.

Why do you put your money at risk?

"That's our job, and it's not our money. We lose enough of it, and we lose our jobs. Ones that pay us each a million dollars or more a year."

So what can you do about it?

"Buy insurance against bad price moves in the temporary investments where the money is at risk. Hedging is what we do, and we're damn good at it. Often we can make more money on the hedges than we do on the trades, in addition to protecting against losses."

Sounds like you've got it knocked.

"Yeah, but don't talk about it, or the customers may catch on."

What could happen then?

"Well, some of 'em are smart enough to figure out if we're willing to pay up for protection, and the way we do it, then they can tell just how far we think the prices can go - in either direction."


"Then they could turn the game around and front-run us. Instead of us making money 9 times out of 10, they might get it. And then we'd get the axe. Before we get our retirement stash built. And I'm almost 30 already."

What a shame that would be. But your secret is safe with me. (Or maybe not. All's fair in love and war, and this is war, if you haven't noticed. It sure isn't love, despite what they all may pretend.)

End of context story

So on with today's skirmish in the ever-present contest. This battle today is among all stocks.

We plan to use the Market-Makers' [MMs] extensive information-gathering systems and intelligence resources to learn how far they think those securities' prices can move in the near future. Then we will have the perspective to decide which of them - if any - are the best places to put our capital to work (and at risk).

Since we have been playing this game daily for over a decade, we know how their present expectations compare with earlier ones. If similar earlier notions on their part worked out well, then the present ones may do as much for us.

Here's what our records over the past 5 years reveal on over 2500 widely-held and actively traded equities, with 30 of the best ones highlighted.

Click to enlarge

The way the market-maker [MM] community has been protecting the capital it has to put at risk to get big-money-fund Portfolio Managers' volume trade orders filled, tells us that they see the price ranges in the first two columns as likely during the next 3 months.

We test how well their price range forecasts have worked in the past by imagining a "buy" in each forecast security at the next end of day's close price, to be held until the first day's end of day price is at or above the top of the forecast range. Failing that in 3 months, that buy is closed out, regardless of gain or loss.

We group the results of all forecasts with similar upside to downside potentials together. The Range Index tells what proportion of the forecast range lies below the forecast day market quote, and is our yardstick for that grouping.

The move from the forecast date price to the sell target potential is its upside prospective reward. Against that, we take as its previously encountered risk the worst-case price drawdown during each of the holding periods while attempting to reach sell targets of each Range Index forecast. Then we average those worst cases together as our risk metric. Those measures of good prospects and bad experience compared to each other, stock by stock, form a Reward-to-Risk ratio, seen in the table's last column to the right. Bigger is better.

Another important dimension of the historic performance is the proportion of "buys" that end their test experiences at a profit. The Win Odds column tells what that percentage has been for each stock at all prior experiences of the present Range Index. The % Payoffs tells what the average size of the net gains has been. The number of market days tells how long, on average it took to close out the historic positions, and the annual rate is calculated from that, using an appropriate 252-day year.

With this data the investor can find a combination of satisfactions or limitations that best fit his set of comforts in putting capital to work. There can be no guarantee that just because events occurred in the past that they must be repeated in the future. But having common past experiences among several investment candidate choices are likely to bring more satisfaction and success to the investment decision process. Especially when under stress of price drawdowns.

We believe that frequent choices among multiple alternatives are an essential part of an active investment management process. We also believe that active management, supported with good information, will almost always build investor wealth more steadily and rapidly than the "long-term-investor" "buy-and-hold" excuse for not doing the thinking that is always required by good ongoing results.

For most investors the objective is to accumulate capital with the least disruption in the process. The experienced investor knows there will be periods of loss and disappointing experiences. He/she knows that there is a trade-off between risk and return. A tradeoff that means excess caution pays a high price in the rate of progress. Conversely, over-enthusiasm has its price in capital loss. Finding just the right balance is a never-ending task.

By "contracting out" the minutia of financial statement analysis and of corporate competitive intelligence leg-work to those who have ample resources and must do it for their own purposes, we try to provide conclusions for comparison near the end of the investment decision process. That seems to us far more productive than offering up gobs of raw material for further mental processing before some conclusions can be reached that finally may form perspective, so an action can be taken.

We want you to be aided in taking action, not merely consumed in pondering problems.

Best-choice stocks now

Salesforce.com (NYSE:CRM) on a price pullback may be at the start of new opportunities to get back aboard last-year December forecasts that met sell targets in January, and January forecasts that met sell targets in February. Keep some powder dry to scale in if additional lower prices are presented, but don't miss a nibble on the current opportunity, where prior forecasts at this level were profitable at a 95 out of 100 rate during the past 5 years, with average six-week gains of over 9% accumulating capital at 110% annual rates.

Direxion Daily Financial Bull 3x Shares (NYSEARCA:FAS) offer continued building future price range recovery expectations of over +13% upside gains, supported by over 200 past forecasts in the last 5 years. There even larger profits were earned, again in six week holding periods, that compound to +190% annual rates. But be prepared for some stress, due to average price drawdowns at their worst points of -11%. Still, 7 out of every 8 past similar forecasts came out in the profit column, not a bad gamble.

Priceline.com Inc. (NASDAQ:PCLN) despite a +20% gain in February continues to be seen by market makers as having another +9% upside. Its past experience following similar forecasts is less than -6% worst-case price drawdowns in over 100 such situations during the last 5 years. Average gains greater than what is now expected were earned then, with only one loss encountered in every 20 commitments. Holding periods of 6 weeks and a day built a gain rate of over +140% annually.

Jazz Pharmaceuticals Inc. (NASDAQ:JAZZ) has had a phenomenal triple in price over the last two years and now is taking a bit of a breather. This gives us a chance to get aboard again under very opportune prospects. The MMs are hedging their bets against being short with the stock rising a possible +14% from here. That's reasonable, since in over 150 prior circumstances like the present gains of over +16% were achieved. And losses of less than -5% were seen in only 1 out of 19 cases. Prior experiences of rates of gain above +200% annually may not be seen again, but they have been enjoyed in the past.

These are all big past rates of gain, with no guarantee of being repeated. But your alternative in the market-average of SPDR S&P500 can be counted on for prior forecast experiences of only +17% annual rates. Your choice?

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.