Healthcare derived demands
Edwards Lifesciences Corporation (EW) provides products and technologies for structural heart disease and critical care monitoring in the United States and internationally. Some two dozen street research analysts see next year and 5-year EW stock price growth at a rate of +12%.
This review overlays their estimates with market professionals estimates of price behaviors of a more near-term nature. Their expectations are unintentionally revealed through repeated market-making needs to facilitate volume block trades in the stock.
Those needs come about to balance institutional demands for stocks when limited supply is being offered by investors at prices currently suitable to transaction orders. That demand can be met by market-makers [MMs] borrowing stock to fill the order, with the intent of covering the short later. It will only be done where a hedge deal can be constructed to protect the MM’s capital in the event of a price rise before the short stock can be repurchased.
How much has to be paid for that protection, and the derivative contract specifications of price and length of time reveal what professional speculators expect may happen to the issue’s price, in both directions, up and down. Figure 1 shows how those expectations have trended weekly in the past two years, in the vertical line ranges from the heavy dot closing price at the time the forecasts were made.
(note: all materials from blockdesk.com have been approved for use and appearance in this article)
In addition to the recent price range expectations of the first two items in the row of data between the blue-background pictures, there are history descriptions of how the stock’s price has changed in the three months after each forecast. Of particular importance here are how often there have been forecasts with similar balances in up-to-down price change prospects like those of today.
In this case there have been 261 daily forecasts in the past 5 years of 1261 market days which had about three times as much upside price-change prospect as price drawdown. That is indicated by the Range Index [RI] of 27. The RI measures what percentage of the day’s whole forecast range is below the current price at the time the forecast was made. The small bottom picture of Figure 1 shows what the past 5-year distribution of RIs has been. Here the current RI is near its most frequent experience, a comfort in placing the day’s forecast in perspective.
The history of EV pertinent forecasts shown in the rest of Figure 1’s data row is drawn only from that sample of 261 prior experiences, as if they were managed under our standard portfolio management discipline, TERMD. A reference to that discipline is here.
The 261 long positions acquired on the day following the forecast would have had profitable outcomes under TERMD in 3 out of every 4 (or 75 out of 100) cases, averaging gains of 6.9%, net of the losses. Including the losses, they would have been held for an average of 45 market days, making the rate of gain [CAGR] +45%, in comparison to the street analysts’ trend expectations of +12%.
The negative in those experiences is shown as an average of the 261 holding periods’ worst-case price drawdowns of -6%. Many of those drawdowns were suitably resolved into profitable closeouts, as indicated by the 75 out of 100 odds for a winning position experience. But the -6% marks the maximum discomfort position needing to be tolerated on the way to the closeout.
Figure 2 updates the weekly 2-year picture of Figure 1. It contains the daily forecasts of the last 6 months, including the most recent-day data not covered by Figure 1.
Here the current upside price-change prospect has risen to +8.5% from Figure 1’s +7.7%. The Win Odds also improve a bit to 77 from 75. The prior positions sample size is still ample at 211 and the drawdown experiences have improved now, down to -5.2% from -6%. No significant changes.
Perspective comparisons with alternative investments
EW offers substantially greater CAGR rate gains of 40+% than the market-proxy SPDR S&P500 ETF (SPY) at +12% with equivalent probability of a profitable experience (win odds).
Edwards Lifesciences (EW) is an attractive wealth-building portfolio holding for near-term capital gain.
Disclaimer: 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 in the SA blog of my name. First months of 2019 to date have produced over 800 hundred profitable position closeouts.
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.