Best Price-Positioned Local, Regional Bank Stocks, As Seen By Market-Makers

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Includes: AAPL, BOH, COF, FITB, GS, OZRK
by: Peter F. Way, CFA

Summary

Risk~reward tradeoffs of this group better those of most Dow-Jones stocks and of most other market average ETFs.

They also outdo the prospects of many money-center banks.

For these comparisons and in other attractive dimensions, some of the group deserve consideration as candidates for investment in portfolios where wealth-building is a principal objective.

The big picture: Risks vs. Rewards

Figure 1

(used with permission)

The tradeoffs here are between near-term upside price gains (green horizontal scale) seen worth protecting against by Market-makers with short positions in each of the stocks, and the prior actual price drawdowns experienced during holdings of those stocks (red vertical scale). The intersection of those coordinates by the numbered positions are identified by the stock symbols in the blue field to the right.

The dotted diagonal line marks the points of equal upside price change forecasts derived from Market-Maker [MM] hedging actions, and the actual worst-case price drawdowns from positions that could have been taken following prior MM forecasts like today's.

Those forecasts are implied by the self-protective behaviors of MMs who must usually put firm capital at temporary risk to balance buyer and seller interests in helping big-money portfolio managers make volume adjustments to multi-billion-dollar portfolios. Their protective actions define daily the extent of likely expected price changes for thousands of stocks and ETFs. Here are some examples.

Figure 1-a

Figure 2

(used with permission)

Figure 3

(used with permission)

If your portfolio contained only Dow-Jones stocks, other than Goldman Sachs (NYSE:GS) and Apple Inc. (NASDAQ:AAPL) there is little expectation of any double-digit price gains. And those two involve above-average (among the 30 stocks) price drawdown risk, and well above the market-index ETFs of Figure 3.

The local and regional bank scene of Figure 1 offers several more promising upside price prospects, at drawdown risks which are average or below to other pictured stocks. Here are pictures of the recent past trends of daily price range forecasts for some of the banks:

Figure 4

(used with permission)

These pictures are NOT typical "technical analysis charts" that only look back in time at past market actions. Instead, they are short visual histories of how forward-looking expectations of prices yet to come may develop. Day by day they evolve as market-makers help their big-money fund portfolio managers adjust their holdings.

The vertical lines pictured are ranges of possible price extremes likely to be encountered in coming weeks and months. The heavy dot in each forecast line is the closing market price for the security on the day of the forecast. It splits the range into upside prospective price change gain and downside price exposure. The up to down balance is Measured by the Range Index. Its numeric tells what percentage of the forecast range lies below the then current market quote.

Capital One Financial (NYSE:COF) at [10] in Figure 1, has seen its price decline recently well below the average of recent past months, and is now down to the bottom of its Market-Maker [MM] price range expected in the coming few months.

That range offers an upside of some +9% with past similar forecast achievements of over +8% coming in an average of 7 weeks, or a CAGR of +79%. The experiences are very attractive, but because of the low price relative to expectations (a Range Index of 2) there have been only 6 priors to use as an average norm.

A look at the Win ODDS shows that 4 of the 6 were profitable and 2 were losses. A comfortable odds proportion would be 2 losses for twice as many wins, or 8 out of 10 wins, 80%.

Let's look at another, Bank of Hawaii (NYSE:BOH) at [4] in Figure 1.

Figure 5

(used with permission)

This stock has many more prior forecasts, 58, with nearly as low a Range Index of 5. Its upside prospect of +12% is larger, but its accomplishments of only +5% is less satisfying. In addition, those net results had profits in little better than 7 out of every 10, and took ten weeks to capture, reducing its CAGR to only 28% -- less than half of COF's.

We might do better with the other stock at this set of Reward~Risk coordinates, Fifth-Third Bank (NASDAQ:FITB), also at [4].

Figure 6

(used with permission)

No thanks. Like COF, the sample size of prior RI-size forecasts is too tiny to provide any comforting history. That makes it a quick reject in our consideration.

Let's look at a bit better return offer, accompanied by a bit larger price drawdown from Bank of the Ozarks (NASDAQ:OZRK) at [2] in Figure 1.

Figure 7

(used with permission)

Now this is much better. While the Range Index of 18 has "only" four times as much upside price change in prospect as downside instead of the ten to 20 times of the single-digit Range Index alternatives, its Win ODDS are better than 8 out of 10, and its achieved payoff % in ten weeks is sufficient to bring its CAGR back up to nearly +60%.

In our book this combination of attributes makes OZRK the better choice for us to be a current wealth-builder in our portfolio, subject to capital availability.

Conclusion

Investing, like the rest of life, is laden with trade-offs. Each investor has preferences and personally-set standards of acceptability. Each investment security candidate for the portfolio has its line-up of advantages and disadvantages to be presented to the investment committee. With a committee of one, the decisions may come more easily than when there are other minds to convince.

But it is important to have the go-nogo decision criteria clearly in mind to apply fairly to each of the available investment candidates. And their attributes need to be stated in terms that are directly comparable to other employable candidates.

We hope to offer selection criteria that aids the investor in framing their investment selection decision parameters fairly and consistently. We believe that the simple TERMD active investment portfolio management discipline works well in the holding period involvement that our information capture process provides.

Think about the factors identified in the Local and Regional Bank illustration here. They should be every bit as pertinent in looking at stocks of food producers, entertainment providers, semiconductor manufacturers or internet services. Let us know where you think improvements will be helpful.

Best wishes for your continuing investing journey. We hope to be of help in the process.

Additional disclosure: Peter Way and generations of the Way Family are long-term providers of perspective information, earlier helping professional investors and now individual investors, discriminate between wealth-building opportunities in individual stocks and ETFs. We do not manage money for others outside of the family but do provide pro bono consulting for a limited number of not-for-profit organizations.

We firmly believe investors need to maintain skin in their game by actively initiating commitment choices of capital and time investments in their personal portfolios. So our information presents for D-I-Y investor guidance what the arguably best-informed professional investors are thinking. Their insights, revealed through their own self-protective hedging actions, tell what they believe is most likely to happen to the prices of specific issues in coming weeks and months. Evidences of how such prior forecasts have worked out are routinely provided. Our website, blockdesk.com has further information.

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.