Near Price-Change Prospects - Best And Worst - SA Readers' Top 20 Followed Stocks

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Includes: AMZN, C, F, FB, SPY, TSLA
by: Peter F. Way, CFA

Summary

From time to time many investors face temporary needs for capital. Emergencies of accidents, medical developments, sudden business opportunities or other unexpected events may occur.

Or capital becomes available and is in need of employment – an inheritance, a bonus, an insurance payoff or a business sale. Good things happen that need investment attention.

This look at the stocks most likely to be present in SA readers' and contributors' portfolios is not to evaluate their long-term economic value prospects. They are all good stocks.

Instead, it compares near-term price prospects, seen by market professionals, to help choose best interim portfolio adjustment alternatives to meet good and bad capital-involving attentions.

Long-term investors sometimes have short-term needs

When they do, current price prospects take on an importance usually submerged by dominant portfolio strategies of patience, fortitude and diversification. For the moment then, there is value in being astute in making intelligent choices on the basis of near-term potential price changes among present portfolio holdings.

Where that is the case and the need is for skills not regularly sharpened, some outside consulting help can often be productive. It can be found in a usually overlooked, unbiased source constantly present in the way that equity markets regularly function.

All stocks fluctuate in price over the course of a year, some more than others, and not all in the same direction at the same time. What causes the differences in price change is not broad economic expectations, but the submerged prospects specific to each security's situation.

Prospects revealed early by the perspective developed over years of diligent ongoing research by trained and experienced analysts, more likely in the employ not of brokers, but by managers of funds handling the capital of institutions and individuals. Prospects continually being evaluated by portfolio managers, who like all of us, want to see the assets in their charge prosper.

They manage the assets actively; that is their job, continually evaluating where the best opportunities for price growth lie, and where potential exposures for price drawdowns exist. Their decisions are translated into holdings - change decisions, usually of sufficient size to make meaningful differences for the whole portfolio.

But with portfolios valued at hundreds of millions to billions of dollars, those change orders are at a scale that can choke today's highly automated markets in their "regular way" operations. Care must be taken by market professionals to handle large-value trades in ways that will avoid the precipitation of a "flash crash" spreading to other securities.

Advances in information technology are a two-edged sword. They need handling with suitable care.

Handling of volume "block-trade" orders is done by human negotiation, rather than by electronic matching systems. Thousands of professionals at trading desks on both the "buy side" (institutional) of the street and the "sell side" (brokerage) conduct the transactions by phone and by bid~offer screens in markets rarely visited by individual investors.

The exclusivity is for the sake of efficiency, where thousands of such orders must be dealt with in an ordinary market day. For an inexperienced, unwitting individual investor such environments are very dangerous places.

The negotiations are to find ways to balance the supply and demand for each security, an imbalance caused by the block trade order issued by a "buy side" fund that will need to be met ultimately by some other "buy side" institution or fund. It is the "sell side" market-makers [MMs] that may temporarily fill the imbalance, after all readily available buy-siders can be rounded up at a price tolerable to the order initiator.

But the sell-side capital put at risk must first be protected from risk by price-change "insurance" in the form of a hedge transaction. Sellers of that protection are sell-siders skilled in the art of arbitrage in derivative securities, between various markets dealing in such securities.

The cost of such market-liquidity must be accepted by the trade-order initiator, or the whole deal will be killed, not filled. Its cost is going to be the result of consulting adults by all three parties; whom are well-informed and experienced regular participants in the task. The prices involved require each to have expectations of just how far the price of the original trade subject may travel.

It is in the hedge transaction that the desired consulting assistance as to price expectations can be found. We do that for some 2500 stocks and ETFs every day, including the 20 most widely of interest to Seeking Alpha readers. An important part of the perspective is detailed in Figure 1:

Figure 1

Click to enlarge

These are listed in order of number of SA folk requesting all updates on the subject security. Collectively they represent some $450 billion of world-wide investor commitments and about $5 billion a day of trading volume.

In terms of the recent-past 52 weeks, about 2/3rds of their prior price ranges are below the current quotes, only one third are above. That is the significance of the average of 67 in the Past 52 Week RI (Range Index) column.

Those price ranges have at their highs exceeded the lows by more than +150%. It has been a profitable past year for holders of these stocks; 2/3rds of 150% means a double, on average.

But what is ahead? What does the persistent hedging activity in these stocks tell about their coming price potentials? We see that detailed in the table of Figure 2.

Figure 2

Click to enlarge

Price range forecasts from hedging activity for these 20 stocks (and an ETF) are in columns (2) and (3). Their forecast Range Indexes [RIs] are in (7) based on prices in (4). The RIs are a starting point in evaluating the investor's attraction to each security.

We choose to provide a menu of investing choices rather than force-feed investors what our palates prefer. It's your capital at risk, you should have some decision skin in the game.

Starting with the pros' forecasts and the RIs thus created, we look to see how well their insights have done over the past 5 years. In (12) we have a count of the number of market days where the forecast RI has been like today's. Note that of the 20, only Facebook (NASDAQ:FB) has shorter than a 5 year history.

For the task at hand of comparing near coming price-changes, the first look should be a reward-to-risk comparison. For reward what is being offered is in (5) the upside of (2) vs. (4). The risk is in (6), rather than we lay out the details this way because {a} each investor has his/her own preferences of emphasis on {b} the complex of reward and risk dimensions in each security - the downside complement to (5).

That is because our experience shows that real-life in the market encounters more severe price drawdowns than the pros in hedging markets will tolerate, and they stack the hedge-deal decks in their favor. To get the more realistic risk exposures we look to see what the worst price drawdowns have been in the 3 months following each prior RI forecast in the sample. The average of those experiences is what appears in (6), because they are the points where the investor is most likely to throw in the towel and sell before losing any more capital, rather than continuing to hang tough for a recovery.

A visual comparison of (5) and (6) dimensions is offered in Figure 3.

Figure 3

(used with permission)

In this map the upside reward prospects of (5) are along the green horizontal scale at the bottom, and the drawdown exposures of (6) are along the vertical red scale at left. Where good meets evil on equal terms is the dotted diagonal. Most value-building buys are down and to the right, better cash-raising candidates are up and to the left.

But there are matters of preference to investors inherent in the life experiences to which each of us has been subject, individually. The resulting choices are neither right or wrong absolutely, but are intended to be best for us in our own circumstances. If we have reliable guidance we can and should make them, not let others do it for (or to) us.

A starting point in the reward~risk tradeoff is credibility of the expected reward (5). An evidence may be found in its comparison with (9), the net percentage price gains, after losses, from the prior RI samples in (12), as measured by the ratio in (13). The profits and losses involved are the outcome of a hindsight-free portfolio management discipline [TERMD] that closes out end-of-day-after-forecast buys at the first market close at or above the highs of (2). If still open 3 months (63 market days) after forecast the position is closed regardless of gain or loss.

Involved in that (9) net gain is the rate of accomplishment of recoveries from the drawdowns in (6), indicated by the odds for wins in (8). Those odds are for many investors a qualitative guide to close alternatives in action decisions, or even a go no-go boundary for all buy decisions.

The blue rows of Figure 2 are present to provide perspective in terms of broader market norms and averages of sets of alternatives. The 20 top SA securities blue average row is immediately above a comparable average for a ranked set of 20 equity securities in our population of over 2500 stocks and ETFs.

The SA top 20 is roughly competitive with the population top 20 in (5) upside prospects, but fails in follow through at (9), importantly because of deficiency in (8) where only 2 out of 3 recover from (6), while the population's best have succeeded in 5 out of 6, or are profitable 84% of the time. Within the SA 20 the better 7 ranked names bring the win odds up to 3 out of 4, nearly doubling the percentage payoff (9) of when all 20 are included.

Still, the SA top 20 are well ahead of the whole population's comparables, nearly double in the (9) payoffs. Interestingly, the SPDR S&P500 Trust ETF (NYSEARCA:SPY) is included in the SA 20, since it is often considered an easy market-average bogie. Of the SA's best 7, 6 rank better than SPY.

But the purpose of this study is to focus on choices within the SA top 20. Going back to the R~R Tradeoff map in Figure 3, let's look at the specifics of some of the outliers. To start where raising cash is the task, Ford (NYSE:F) at [11] and Citigroup (NYSE:C) at [7] are the better candidates.

Citi's price forecast history is seen in Figure 4.

Figure 4

(used with permission)

Citi's past forecast history is not convincing or encouraging, even at RI levels where most stocks produce credible positive results. Out of an ample sample of 168 prior forecasts across 5 years, with only 1/3rd of the range to the downside and 2/3rds to the upside, barely 6 out of 10 were able to recover from price drawdowns 1 ½ times the upside forecast, leaving a negative net result. Not a good scorecard for the MM community in terms of C price range forecasts. Why believe them on this one now?

A second cash-source alternative is F, with its past 6-month forecasts pictured in Figure 5.

Figure 5

(used with permission)

Here we have a sample size of a full third of all forecasts in the past 5 years, and less than half of them could produce profits in coming 3 months. If the need for cash to be raised is temporary and will be returned for reinvestment in less than a year, then F may be at a lower price to take advantage of at that time. Still, with an annual rate of gain of only 4%, there ought to be many other quality stocks with more attractive alternatives.

The demonstrated MM forecast skills here are pathetic. The stock at $13 has already backed down halfway from its high of $16, and as a low-priced stock its price erosion can easily get overlooked until it is too late to do anything about it.

There is little demonstrated price support from institutional buyers for this stock, whereas a competitor has garnered a great deal of attention. If the investing task at hand is what to do with a new inflow of investable cash, one of the more promising alternatives is Tesla Motors (NASDAQ:TSLA), seen in Figure 3 at point [12].

Figure 5

(used with permission)

TSLA has had a strong rise in price so far this year, but it has been accompanied by a strong rise in coming-price expectations. Those upside expectations have disappointed a bit in a 3-month context, but when the horizon is extended to a year the performance has magnified to triple-digit CAGRs.

Figure 6 displays the CAGR price changes of TSLA on a cumulative-by-month per column basis taken daily over the past 5 years, at all levels of Range Index, expressed as % upside to % downside proportions. A 19 RI is ~ a 5 to 1 ratio, as indicated by the magenta 70 in the #BUYS (forecasts) column. The blue row of 1 : 1 averages all price changes and shows an annual growth rising from 55% in 1 month to 69% in 12 months, or 123% from prior buys at present forecast levels.

Remember, prior, not promised. But still a bit better than F's +4%.

Figure 6

Click to enlarge

Competitive controversy over industry efforts to catch up will probably continue to keep price volatility present and maintain institutional interest.

For another new-cash commitment, Figure 3 suggests Amazon.com (NASDAQ:AMZN) at [13]. Here are its details and MM forecasts trend, in Figure 7.

Figure 7

(used with permission)

AMZN upside continues to be disrupted by modest drawdowns, cutting its payoffs in half by a win odds of just less than 2 out of every 3. That is a discouragement for use in situations that may have shorter-term satisfaction horizons. Still it produces CAGRs in the TERMD discipline of mid-30%, a plus for most portfolios.

Conclusion

Every portfolio is likely to have holdings that present more or less advantageous price change prospects at different times. Right now the better sources to raise cash from among the most-followed stocks on Seeking Alpha are Citi and Ford. At another point in time it likely will be others.

To put new capital to work, appealing stocks among the most followed are Tesla and Amazon.

Professional market-makers have special insights into supply and demand changes for individual stocks, arising from the activities of their big-money fund clients. Those pressures regularly lead to price changes that can be wealth-building for individual investors who understand their presence.

There are even more attractive buy candidates among lesser-followed issues than these top-20 most followed ones. Useful efforts can be spent in finding aggressive wealth-building equities. Seeking Alpha readers should continue to search offerings by experienced contributors.

Disclosure: I/we 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.