On several -- except perhaps Price/EPS, which may not be important.
What kind of nut thinks P/Es aren't important?
The kind of nut that looks to see how rational, well-informed investors actually behave. Like the ones running 872 institutional investment organizations that currently own 84% of the float of Amazon.com, Inc. (AMZN), and two-thirds of the outstanding stock.
They are the ones that put the stock's price where it is -- at over 100 times next year's projected earnings -- and keep it there.
We look daily at the actions of market-making professionals who help those big-money fund portfolio managers buy and sell AMZN shares. We note how they hedge the firm's capital they must put at risk in order to complete the million-dollar-plus orders being put to them.
What they are willing to pay (out of what otherwise could be a trade profit) for protection against unwanted price moves, and the way they build their hedges tells -- by our behavioral analysis model -- just how far they think their fund clients, as owners, are likely to ride the stock, both up and down.
On Friday, October 12, that AMZN implied price range forecast was for a high of $269 and a low of $233. From a current price of $242, those are upsides of +11.1% and a downside of -3.6%. Three-fourths of the forecast range was above Friday's close, and one-quarter was below it. Hardly a negative appraisal.
So how does that compare to a similar evaluation for Apple, Inc. (AAPL)?
The implied price range forecast by volume market-makers for AAPL on the same date was a high of $731 and a low of $614. From the current quote of $630, those are possible price changes of +16.2% and -2.5%. Only one-eighth of the forecast range was lower, seven-eighths was higher.
See? Those are bigger upsides and smaller drawdown potentials than for AMZN.
Yes, but one needs to be an odds player in this very serious game. Unfortunately, the odds of AAPL's forecast happening are less likely than for the AMZN forecast.
There are two (reinforcing) ways of measuring those odds, in the same forecast horizon that produces the implied price ranges -- the next three months. The first way is to look at how each stock's prices actually have behaved during the three months following all prior forecasts that were at least as constructive at the current one, going back at least as far as one full market cycle. (We used the roughly five years from mid-2007 on.)
We find that for AAPL, its price was higher than on the forecast date 69% of the time and lower 31%. For AMZN, it was higher 75% of the time, lower 25%. Score one for AMZN.
The average size of AAPL's higher price changes was +10.6% (compared to its current forecast of +16.2%), while AMZN's average gain was +12.3% (higher than a current forecast of +11.1%). Score another point for AMZN.
The drawdown exposures were -5.3% for AAPL, -5.2% for AMZN. Call it a draw.
Hey wait a minute -- are those averages coming from similar sample sizes?
Yes, in the about 1250+ market days covered, there were 83 equal or better forecasts for AAPL (6-7% of its set), vs. 123 for AMZN (10% of its measurables). AMZN is the stronger sample, and a 7% poll of AAPL's population is not too small to be considered inadequate. Another mark in favor of AMZN.
The second way to compare the credibility of these forecast price ranges is to use them in a disciplined, rigorous, realistic investment process. Here's what we suggest:
Simulate a blind draw from a forecast like Friday's by making investments in all the forecasts identified in the prior measurement of price change history. Use the top of the forecast range in each case as a sell target, with position closeouts at the end of the first day where price equals or exceeds the target. Set three months as a patience time limit for all positions. At that point, if the sell target has not yet caused a closeout, the calendar clock now causes one.
Each position maintains its original sell target and holding patience calendar, regardless of subsequent forecasts. Determine the odds for success and the average payoff likely, the average length of time the capital may be committed, and the annual rate of gain or loss.
When we run this discipline on the AAPL qualifying forecasts, some 65% of the positions get closed out with profitable results. Including the losers, the average gain was +7.1% in an average holding period of 38 market days, or an average annual rate of 57.5% Not bad.
But not as good as AMZN. There, 89% of the positions closed out at a gain. Including the losing positions, the overall average was a gain of +10.4%, achieved in 36 market days, on average. The annual rate was a +97%. Again, score to AMZN.
In both cases the average maximum drawdown (from cost) was -6%.
Here are bar graphs of the position-by-position simple percentage payoffs for each stock.
Note that the number of closed out positions in the AAPL picture is substantially smaller than the 83 counted forecasts. This is because 32 of the forecasts have not yet reached their sell targets, and the holding time limit has not yet been reached.
They may yet get to profitable closeouts, but at this point, only seven of them are marked to market above their entry costs. The other 25 are all under water on that score, and do not help AAPL's case at this point.
Like it or not, explainable or not, at this point, AMZN offers a better prospect of future investment gains, based on the way it is being viewed by professional investors and market-makers.
How the future will unfold remains to be seen.