Market-Makers' Best Equity Bets On Presidents' Day, 2014

Includes: AMRX, HAIN, MDSO, MU, V
by: Peter F. Way, CFA

Executive summary:

  • Best next 3 months wealth-building equity price-gain prospects are listed here.
  • Ranked by future price range forecasts derived from the self-protection hedging actions of experienced professional volume market-making specialists.
  • Graded by actual market-price changes following prior upside-to-downside price range forecasts in each stock similar to today's.
  • Time-efficient sell discipline performances averaged +12.4% net gains in 8-week holding periods, having wins in 95 of every 100 from over 500 priors.
  • The top-ten buy candidates now offer +12% upside sell targets, while their worst-case average price drawdowns in those 500+ experiences averaged -4%.


Readers who already know how the future price range forecasts are derived and compared may want to go directly to the table below.

Where do the forecasts and comparative data come from?

Every market day, big-money fund portfolio managers [PMs] employ professional volume block traders at market-making firms [MMs] to help them liquidate and reinvest equity capital in million-dollar-plus blocks, hundreds of times, in hundreds of stocks and ETFs.

The MMs' help is needed because at the trade size needed by the fund clients to get done what they require, the markets typically won't accept that much volume to be offloaded, and/or provide that much supply of available stock for the fund to acquire. Particularly not at the prices desired.

Making markets where a price is discovered that will clear both buyers and sellers is what the MM firms are all about - along with getting paid for making it happen. To do that, they usually have to provide "liquidity", meaning temporarily owning the stub end of a block that there are not buyers to be found for, or selling (short) shares to be bought, where none can be plied loose from existing holders. All that takes is putting MM firm capital at risk.

And MMs abhor risk worse than nature abhors a vacuum.

So MMs have become masters at the art of hedging, the business of dealing in price-change insurance. Their block trade desks need to buy insurance to cover their capital when at risk in providing market liquidity, and their proprietary trade desks find profits in the sale (for an adequate price) of such price change protection.

To avoid legal (and internal dispute) problems, both sides of the hedge typically will not be done in the same firm. The cost of the insurance is built into the order trade spread negotiated by the block trade MM with its fund client. Since the stub of the block that must be facilitated usually is a small portion of the total trade value, its cost is not usually a deal breaker, but it could be. So the seller of the insurance does not have free rein to price his performance of protection on the deal.

Still, the insurance seller has to have sufficient knowledge of what might happen during the life of the price protection contract to structure the deal with enough profit potential to cover those losses that may inevitably be incurred. To acquire that knowledge, the MMs, over decades to centuries, have developed world-wide instantaneous information gathering systems based on cutting-edge information technologies and equipment and extensive, geographically-dispersed human resources.

Just behind risk on the MMs' no-no list is ignorance.

Both buyers and sellers of the price change insurance are equally well-versed on what may need to be protected against, either by contract, or by the price charged for it, so the markets for protection are finely tuned. Our advantage lies in knowing how to translate what will be paid for the protection, and how the deal is structured, into just how far, both up and down, the covered protection will reach in terms of the security's price.

Price range forecasts are derived from that advantage, and based on their prior experiences, actuarial tables are kept telling how subsequent prices did actually behave. They are contained in the following table, based on protective market actions taken on Friday, February 14th.

These top-ranked stocks and ETFs draw reassurance of future performance from prior experiences indicated by the Sample Size column. It tells how many times forecasts have been derived (by an unchanging process in the past 3-5 years of market days) that had the same balance of upside-to-downside prospects as does today's.

Such balance has been a consistently useful discriminator of future price performances on an issue-by-issue basis in our daily analyses over the past decade-plus. The balance is measured by the Range Index, which tells what percentage of the forecast range lies below the market quote at the time of the forecast.

The various performance data are the outcome of a sell discipline requiring closeout of a position (acquired at day-after forecast close cost) at the first instance of reaching or exceeding the top of the forecast range price, or no later than 3 months after the forecast date, regardless of price.

The credible ratio indicates achieved profitability as a multiple of the current forecast upside. The reward-risk ratio relates promised forecast upside as a multiple of worst-case price drawdowns experienced during holding periods of similar prior forecasts.

Specific stock observations

The top-ranked stock, Visa Inc. (NYSE:V), does not need market-maker identification as a star performer for many investors, since it has maintained an annual rate of price growth of +45% during the past two years. But during that time, it has been as cheap as it is now (seen through MM eyes) nearly two dozen times, and has produced price gains at an annual rate double its longer-term average, every time.

Impax Laboratories Inc. (IPXL) is far less well-known, with a $1.5 billion market cap only 1% of that of V, and a price growth rate of only 6-7%. But it is one the funds that the MMs have pegged well, so that they have had over 40 chances like the present to capture nearly +18% gains in about two months. Price volatility so well identified, with interim drawdowns less than -5%, rather than being a risk is an opportunity to score triple-digit annual rate returns in single-instance simple percent returns large enough to carry most stated portfolio performance objectives.

Medidata Solutions Inc. (NASDAQ:MDSO) is another perhaps less well-known small-cap enjoying 200%+ annual growth in price on a fairly steady basis. It provides information support services to the medical care sector. Over 65 prior occasion forecasts have encouraged commitments with targets accomplished in little more than a month at rates that for this company have been average, but for most have been staggering. All with average worst-case price drawdowns less than -4%.

Micron Technology Inc. (NASDAQ:MU) is on a recovery supporting 30% trend growth in its stock price, but past industry uncertainties impede confidence in how long that may continue. The appraisal of MMs as to their client intentions give comfort to prospects within the next 3 months - not merely to business fundamentals, but also including the attitudes of big investment organizations. Strong triple-digit gains are indicated by forecast sell target and prior accomplishment of the same, if previous behavior persists.

Hain Celestial Group, Inc. (NASDAQ:HAIN) sports a stock price growth rate (+45%) that is the envy of most businesses, let alone the food industry of which it is a special part. When perceived by MMs to be cheap, as it is now, that growth has been more than doubled into a triple-digit pace by achievement of sell targets within a two-month period. Worst-case price drawdowns while on the way to those accomplishments have averaged only -4 ½%, and wins have been about 9 out of 10.

Other high-ranked stocks contain several well-known names and are worth examining. Beyond the top ten, there is an even broader array of buy candidates with favorable past prior experiences under current forecast circumstances.

Portfolio Management Considerations

Naturally, just because events evolved one way in the past, there is no guarantee that they will behave the same in the future. But humans tend to be creatures of habit.

The stocks recommended here are recognized because of the past reliability of achieving significant profits in fairly short periods of time. While the primary attention in the table is directed toward the top ten, the fact is that there are over two dozen fairly comparable candidates that surpass what is expected of the S&P 500, as represented by the SPDR (NYSEARCA:SPY). In addition, the background of alternatives as represented by the nearly 2500 stocks and ETFs covered provide a much less attractive set of choices.

Because of the dynamics of market price changes, the cast of attractive characters is in frequent change. By acting with a shorter-time objective horizon, many striking opportunities present themselves and should not be ignored.

Market-makers have demonstrated that they have keen insights into the near-future likely behavior of prices of securities with which they are familiar. Among the thousands of listed stocks, there may be only a few hundred where their skills are particularly sharp, but those will evolve as their clientele of big-money funds develop new interests.

Individual investors can take advantage of what the MMs see when those insights are made available. Often, they are far more advantageous and profitable than the conventional "follow the herd" advice so generally offered.

Disclosure: I 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.