Potential Price Problem Stocks You May Be Holding

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Includes: MCD, SPY, TWTR
by: Peter F. Way, CFA

Summary

Using a possibly-dated list of 50 stocks of greatest interest to SA readers we scanned for potential problem issues.

Instead of seeking the most promising ones we sought those having the worst current Reward~Risk ratios coupled to poor credibility of gain forecasts, when compared to prior achievements.

Here are the top ten “winners” (losers) for consideration if reducing allocation of assets to equities is a current objective.

Illustrations of a few are included. You decide if they are of sufficient concern, or provide opportunity for portfolio improvement.

We have a special way of looking at stocks and ETFs

If you have seen this before, please jump to the next bold-faced headline.

Technology advances in communications and information have transformed the way securities markets operate, and the way major investors behave as a result. Prices of equities now normally gyrate during one-year elapsed periods in ranges that are typically multiples of the underlier's trend growth.

Which means that during part of the year period their prices are retreating, and are consuming time investments that cause the "growth" trend rates to be far less than what their better progress periods provide.

Information technology advances encourage investment professionals (the market-making [MM] community) to protect the capital they must put at risk to do their jobs, and those actions cause the markets for equities and derivatives to become more integrated than they were in most of the 20th century.

So we study what the Pros' behavior causes to happen in the price-change "insurance" derivatives markets, to understand just how far it is reasonable to believe specific stock and ETF prices may move in the next few months, both up and down.

This analysis has been conducted without material change daily for over a decade on more than 2500 widely-held and actively-traded stocks and ETFs. The resulting price range forecasts provide an actuarial history (unmatched elsewhere in the investment community) of subsequent market prices, as testimony to the strength or weakness of the forecasts made earlier.

How bad could it get?

We're not forecasting a price disaster for the market. Just pointing out some of the usual interim price declines that strike virtually all stocks during the course of a year. Compared to the 50 stocks many Seeking Alpha reader/contributors most want to stay on top of, here are the ones most suggested to be at risk, given recent Market-Maker [MM] forecasts.

Of particular concern is how well forecasts like today's actually produced the gains expected. The table in Figure 1 lays out their price forecasts in columns (2) and (3), with risk~reward details in columns (5) and (6).

Figure 1

Click to enlarge

source: blockdesk.com

If this notion or analysis is all new to you, it is further explained at the blockdesk.com website.

Column (5) tells what upside prospect is found in (2) vs. (4). For each stock, column (9) tells the average gain achieved by the sample of similar prior forecasts counted in (12). The "top" ten here all produced net losses in the 3 months subsequent to their sample selections, averaging -2.6%.

That contrasts with the other blue aggregate rows like SPDR S&P500 Index ETF (NYSEARCA:SPY) at +2.7%, or the 2500+ issues population average of +2.4%, and the day's 20 best-ranked issues from that population at +9.9%.

Column (13) measures credibility of the current forecast by comparing (5) with (9). There, the Best-odds issues +9.9% performance compares favorably enough with their average expectation of +10.3% to win a +1.0 credibility ratio in (13). SPY gets a +0.39, while the population at large fails the credibility test at -0.10. along with the problem stocks at -0.19.

Those results seriously undermine the "reward" to risk ratios of (14). What is shown in (14) is the comparison of the now questionable (5) with the actual worst-case price drawdowns in (6) experienced while attempting to reach the price targets in (2).

Acceptance of the (5) expectations as a contrast to (6) gives a (14) score of 1.1 to the ten "potential price problem"stocks. The risk-resistance of SPY is evident in its 1.9 evaluation, compared to the population's horrible 0.3 and the best-odds good score of 1.5.

In a simplistic effort to combine the problems of (13) with the strengths of (14) we created (16), a mere multiplication of (13) and (14). There the negativity of (13) prevails, with the pervasive effect of questionable upside forecasts pulling down the 10 "worst" to levels comparable to the population at large. Only SPY and the 20 Best-odds average have attractive results, with the 20 at a figure double that of SPY.

Some illustrative recent forecast histories

Here are once-a week excerpts of MM price range forecasts over the past two years (the vertical lines, split by market quotes at the forecast dates). Trends of the expectations are usually indicative of coming price direction when reinforced by following prices. When that relationship stops, Range Indexes move to suggest new directions.

Figure 2

(used with permission)

Twitter Inc. (NYSE:TWTR) has repeatedly failed to accomplish a turn-around. There is no sign that now is likely to be different.

Figure 3

(used with permission)

McDonald's (NYSE:MCD) may have just gotten ahead of itself. This may be a good time to take profits, and return at a more propitious interim point.

Conclusion

We haven't recommended selling any particular one of the "10 worst" stocks, only that they represent a set of vulnerable issues, in comparison to the SPY market average and 20 other choices where far more encouraging prospects exist. In today's markets all stocks share eventual interim price drawdown experiences.

Nor are we advocating an asset allocation favoring the reduction of equities in portfolios. We believe the only "safe" (but unproductive) asset at present is cash (in US $). Dollars are relatively safe for now, given the country's appraisal by most other financial markets as the most defensive place to sequester liquid resources.

At present, and for the next few months, it is evident that market professionals, by their self-protective hedging actions, see reasonably healthy conditions here for quality equities, along with quite attractive price prospects for selected ones.

It is just that at this time, these 10 stocks are the most likely to have damaging experiences. Investors with active selection strategies may find these issues good sources of capital to reallocate into more productive capital gain vehicles.

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.