A Tale Of Two Knives -- Falling

| About: Owens-Illinois, Inc. (OI)


Which should you try to catch? Either? Or both?

How often in the past have they done what they are doing now?

How sharp are they? How bad a cut have they made when they fell this way before?

What has their ultimate recovery been worth?

Well kid, do ya feel lucky?

Bargains sometimes come in time of stress. So do bad choices.

Here are two today-illustrations of the proposition: Do you want to buy into the falling prices of either Allscripts Misys Healthcare Solutions (NASDAQ:MDRX) or Owens Illinois, Inc (NYSE:OI)? MDRX is a 21st Century software systems provider for the broad medical care industry, while OI has been producing glass containers for food and beverage products since the start of the 20th Century. Their investment considerations are brought together by the common problem of deciding when or whether an active investor might want to buy a stock currently getting cheaper.

They're not alone, but come to our attention because they were adjacent to one another in our daily ranking of over 2300 equity investment alternatives, near the top (19th and 20th) of that list. Both are now being forecast by the hedging activities of market-makers [MMs] as offering near-future stock price gains very competitive with hundreds of equity alternatives.

But both are good examples of how or whether to decide to reach out and catch something that could have either a timely reward - or a dangerous hurt. Let's start by looking at how the MMs have been seeing each, daily, during the past 6 months. First, OI:

(used with permission)

In this picture the vertical lines portray the range of prices implied as likely to occur in coming days, weeks, and months, not the past actual daily price ranges common to most stock "charts." Each MM forecast range is separated into upside and downside expectations by the end of day market quote at the time of the forecast.

Today's forecast (at the far right) has practically no downside. Our measure for the balance between prospective gain and pain is the Range Index [RI], whose value is the percentage of the whole forecast range that lies below the market quote at the time of forecast. A low RI means the pros see it as cheap. The RI now is 1, and the thumbnail picture shows how extreme and infrequent that experience has been in the last 5 years of daily forecasts.

Now here is the parallel for MDRX:

Same 6-month daily history of MM forecasts. Its current RI is 11. This recent 126 days' record and the thumbnail picture are backed up by 4+ years of history, not quite the 5 years we would like . That still ought to be enough to draw reasonable conjectures about what may be coming.

The single row of data below each of the Block Trader Forecast [btf] pictures helps build our thinking about that future.

It repeats the current day forecast range, today's RI value, and a calculation of the potential upside price change from today's close price to the top of the forecast range. The remaining data to the right are the products of applying our standardized Time-Efficient Risk Management Discipline [TERMD] to all prior similar RI forecasts of the past 5 years.

In each case a red-background panel of the Sample Size reflects our preference to have 20 or more instances of similarly-balanced RI forecasts to indicate what has happened before. In these cases, because of the low RI values and their typically infrequent appearances, that is not the concern that we would have were the RIs, say, 30 or 40.

The rules of the TERMD are simple but inflexible as to subsequent judgments. A buy cost for each such RI position is established at the closing price of the next market day following the forecast. The position will be closed out at the first instance of an end of day price at or above the top of forecast range sell target, or failing that, on the 63rd market day after forecast. But not before. That keeps all results measurable on a common footing.

So for MDRX, the 15 prior experiences produced an average net gain of +14.4% and on average had to be held 43 market days, for an annual rate of gain of +121%. Those 15 holdings included an average worst-case price drawdown at a -5.1% level of stress. Also in the negative considerations column is the win~loss odds experience. A 93 out of 100 Win Odds is the equivalent of 14 wins out of 15. Lastly, the credibility ratio compares the current upside sell target of +14.5% with the actual historic average gains from this level of RIs at +14.0%, a quite acceptable ratio of 1.0.

All in all, a quite competitive TERMD scorecard. Let's look at OI's.

The Sell Target here is smaller than for MDRX, at only +8.7%, but in its prior 18 like RI experiences, it achieved actual gains of +26.3% in only 34 market days for a staggering price gain AROR of +453%. Credibility of a current upside forecast less than 9% seems assured. Further, the 94 / 100 win odds are the product of an experience of 17 wins out of 18.

But the average worst-case drawdown stresses at -8.8% suggest a prior price volatility that might get revisited in a present experience, making a reward vs. risk balance of 1 for 1 less attractive than in the case of MDRX with a +14% vs. a - 5%, or nearly 3 for 1.

Now, here's the hard question, not easily answered by history. Still looking at OI, its price expectations as expressed by the way MMs are protecting themselves, has been pretty stable over the past several days.

Rechecking their expectations for MDRX leaves the impression instead that still more price weakness may be there yet to be experienced.

Okay, let's come back to what such a weakness may "cost". In the past the average stress has been seeing your investment in its worst moments down 5% below what you paid for it. Even if that average of worst prior experiences might contain one with no drawdown (a market-bottom pick) and one that was double the average, the worst-case worst case is still only down only -10%. If you're that much of a sissy, why don't you just buy an annuity?

The "cost" of price volatility comes ONLY when the investor decides to lock in his/her loss of the present by selling, rather than see it possibly get worse, never to recover. The "benefit" of price volatility comes every time it does recover, including a gain to the level seen as likely. In MDRX such a recovery has happened in 93% of the times. Not bad odds against making that bad "cost" choice.

Now, the same thinking applied to OI: After seeing the market pros repeat their conviction a number of days in a row that it is not getting worse, how likely is a -9%, or even an -18% likely to still be present 3 months from now? If seen at all? Forget that annuity nonsense.

No, the choice here is between two very high odds for success situations, one with slightly larger interim stress possible and acceptably competitive profitable payoff in a reasonable two-month period (OI at +8½% target, compoundable 6 times a year for a +63% AROR) or the other (MDRX at +14½% target, about double OI's AROR when compounded, but perhaps with some greater uncertainty about a less-well-defined interim experience.)


Is your glass half-full or half empty? How important to you is assurance of success under less uncertain conditions? Does thirst for excitement or real pressure for more rapid growth in capital rank high in your preference? It's your call, knowing that there are hundreds of worse choices out there now than either of these two good ones.

Well kid, do ya feel lucky? Or is it just time to be sensible and get on with making sound choices? Both can be a good decision, compared to lots of others.

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.