Focus of discussion
Investors may have a variety of reasons for putting capital at risk. They may be seeking additional income outside of employment, accumulating capital against known, scheduled expenses (like college costs for offspring), building financial reserves against unknown hazards, preparing for a comfortable retirement, or even as a means of excitement and amusement.
We focus in this article on wealth building by capital appreciation in equity investments. Special attention is given to the efficient use (and investment) of time in the process. Our reasons for these concerns are outlined in this previous article.
Income investors and pure defensive capital-protecting investors will likely find a more productive and comforting expenditure of their time and attention elsewhere.
What's Important in Wealth-Building
The four key issues are the same as they have always been: 1) Selection, 2) Timing, 3) Risk and 4) Reward. We offer for consideration an integrated approach to dealing with all of these in a flexible, adaptable framework that can be easily understood and tailored to individual preferences. But many folks find it runs counter to what is traditionally held to be "acceptable, conservative, proper and conventional" ways to manage one's investment capital. Further helpful discussion of these issues can be found here.
The criteria we use to search for best equity investment candidate selections from the over 5,000 possible alternatives now are:
Current calculable price range forecast - reduces list to 2,500-plus
At least 3 years of daily forecast history available -reduces list to 1,550-plus
Upside price prospect to top of forecast by at least +8% - reduces list to 1,000-plus
Prior forecasts subject to Time-Efficient Strategy profits = upside forecast - a list of 105
Prior forecasts under T-E discipline winners at least 7 of every 8 - a list of 49
Current Forecasts offer upside rewards at least twice the worst price drawdowns of prior like forecasts - now our best-candidate list of 29 stocks
The list of today's best-bet 29 equities
Columns in the above table show the following:
- Date of the analysis, Ticker Symbols of the stocks and ETFs.
- Upper end of the Forecast price range derived from market-maker (MM) hedging.
- Forecast lower end price.
- Market quote at end of trading on analysis date.
- Percent change from (4) to (2).
- Average of most severe price drawdowns from (4), in sample experiences of (12a).
- Metric of percent of (2) - (3) price range between (4) and (3).
- Percentage of (12a) experiences ending profitably under Time-Efficient Strategy.
- Average size of net gains among all (12a) experiences.
- Average holding period of (12a) experiences under Time-Efficient Strategy.
- Annualized Rate of gain from (9) and (10).
- (A) Number of forecasts like (7) from (B) past 5 years' days forecasts.
- Ratio of (9) divided by (5). A forecast credibility test.
- Ratio of (5) divided by (6). The reward to risk ratio.
- Odds-weighted rewards - risks, times frequency of prior such opportunities.
Please invest the time necessary to understand what each of the columns mean. Then test your understanding against this statement: Chicago Bridge & Iron (NYSE:CBI) stock, an infrastructure demand play, in the next 3-6 months might sell as high as $83 or as low as $72, according to the way market professionals demand to be paid for taking the risk that the stock could range that far up or down. In the past five years there have been only 54 days when CBI has been seen to have the kind of upside to downside of today's Range Index of 25. When subjected to a time-efficient strategy discipline limiting any holding to a maximum of 3 months (63 market days), and requirement of a closeout sale on the first instance of reaching the high price forecast, the average number of days the 54 positions were held were 36 market days. It turns out 51 of them (94%) ended profitably, and the annual rate of profit from the +13% gains achieved on average was +133%. The current forecast upside target was encouragingly exceeded by the average gains achieved in prior like forecasts. The prospect of upside gain was over 2 ½ times the typical worst price experience of the 54 priors. No guarantee that a buy here must be profitable, but the historic experiences are quite reassuring.
Now these statements may have more meaning for you.
Jazz Pharmaceuticals (NASDAQ:JAZZ) offers a nearly +13% gain potential at a historic risk of only -5%, and only -1% more than might be encountered in an investment in a market-proxy investment in ETF SPY, which has experienced annual returns less than two tenths as large as JAZZ. No contest between the two.
AmTrust Financial Services (NASDAQ:AFSI), a property-casualty insurer, has seen 53 prior day's forecasts in the past 4 years come up winners in 9 out of every 10 times. The present Range Index indicates 2 ½ times as much upside as down, although past experience has not been quite that good. The stock's fundamentals with a ttm 11 P/E are strong and a forward P/E of under 9 and PEG ratio of .64 suggests good downside defense.
Hain Celestial Group (NASDAQ:HAIN), a foods producer and distributor, is at a pullback price rarely encountered, relative to MM forecasts. In its 5-year history infrastructure demand play, it has repeatedly been seen to provide 2 for 1 proportions of upside to downside price prospects, not a terribly unusual set of experiences. What is unusual is to bring home profits in 95 out of every 100 prior similar forecasts, and profits larger in size than are currently being forecast. Doing that in only 7-week average holdings produces annual rates of return making -5% drawdown prospects quite tolerable for many investors.
Aetna, Inc. (NYSE:AET) is being read by many, apparently, as clever enough to benefit from Obamacare to present nearly 3 times as much price upside as downside. When it has forecast that in the past, only 41 days in 5 years, its Win Odds have been impressive, like many already mentioned. A longer gestation period for holdings brings its annual rate of gains back to only 5 times that of the market-proxy ETF. That's hardly discouraging. Its prospective payoff is twice the drawdown potential.
Just because these specific experiences have presented themselves in the past, there is no guarantee they will be repeated currently. They could easily be worse - or even better. But in comparison to the larger population of 2,500-plus alternatives, or the easy market-proxy ETF of SPY, the full list of 29 offer pretty attractive investment buy opportunities. Their win rate of 19 out of every 20 at today's forecast levels is pretty impressive.
While many observers fear raw price-advance comparisons with prior market bottoms and tops, the folks who make those prices move, and their MM helpers, see quite different prospects for at least this select bunch of investment candidates.
Their guidance so far this year has produced realized gains on 111 real-time published recommendations, at an annual rate of over 29%. That compares to a SPY buy and hold gain at under 12%, a better than twice as good performance. We ended last year with over 200 real-time published recommendations gathering in gains at a +58% annual rate, while the 2013 year's SPY buy and hold was +29%.
At what rate did your cash reserves earn in 2013, or YTD in 2014? And the dividend-payers yields?
Selection and time discipline makes the difference.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.