The best “sure bets” currently are Medicare stocks
Healthcare stocks number in the several hundreds. Biotechs alone count over 200. Which stocks present odds-on opportunities? Better than the others? How to tell?
Answer: Find a good stock price forecaster. A forecaster who has demonstrated their skills, repeatedly, under a variety of circumstances. One that knows when to say “Yes, buy this stock now”, with a clear idea of when to sell it.
Today, that stock is Cryolife, Inc. (CRY). For several reasons.
The best reason is that CRY now is scoring better on most of the seven compelling test measures than over 4,000 other stocks we examined and measured today. Figure 1 presents the company’s specifics of many of those test measures.
(Note: All materials from blockdesk.com have been approved for this article)
This is NOT A GUESS about the future based on “technical analysis” of past stock prices. It IS A RECORD of how past real price FORECAST COMMITMENTS have been fulfilled by subsequent market prices.
Those forecasts are pictured by the vertical lines spanning the ranges of price expected to occur in coming weeks and months - ranges which encompass the closing price on the day of the forecast as a heavy dot. That dot typically separates the range into forecasts of upside price gain prospects and drawdown price exposures.
The row of data between the two blue pictures of Figure 1 makes explicit the extremes of today’s price range forecast, from $28.86 to $35.24. Today’s market quote of $29.54 puts 90% of the forecast range to the upside, and only 10% of it to the downside.
Those proportions are important, because prices yet to come are often influenced by the presence and extent of forecast imbalances. Today’s Range Index [RI] measure of 10 (the downside portion) compares to the array of past 5 years’ daily measures in the lower picture. Clearly, the bulk of history has been for RIs at 10 to move to higher price positions in subsequent forecast ranges.
Seven important measures
The Range Index is the first of seven important clues about prices yet to come in weeks and months. Different levels of RI have histories of varied coming price extremes. In today’s posture of a RI of 10, there has been an average historical gain of upper-teen percentages. The opposite appears likely for RIs on the other side of that "thumbnail" distribution.
Two additional important forecast notions are related to this outlook dimension. The first is how well the historical gains for today’s RI compare with the upside prospect indicated in today’s price range forecast. The data row above shows that upside may be +19.3%, and it indicates the actual price gain achievements of prior RI 10 expectations to be +17.5%.
That comparison provides a strong credibility ratio of 0.9 for today’s forecast.
An important contributor to that credibility is the third of our seven measures, the Win Odds, or the percentage of the time an investment in this stock with today’s RI has had a profitable closeout experience. Since, in in the past 5 years, there have been 31 days with a RI of 10, and 30 of them have been profitable, CRY’s Win Odds here are 97 out of 100.
Related to the Win Odds is a question of how reliable may be the sample size and nature from which the odds measure is being calculated. Suppose a contrast to CRY today: If XYZ has Win Odds of 87 coming from 7 wins out of 8, and if the 8 existed only in forecasts of the last 126 market days (6 months), are you as comfortable about that record? There should be a question of how confident one might be about the repeatability of such profits.
If all 7 wins might have come perhaps from one sequential string of RI experiences in a week and a half of elapsed surrounding time, then this simply could be a non-repeatable accident of peculiar circumstances. To minimize such possibilities, we require at least 20 forecasts of a specific RI coming from an elapsed forecasting period covering at least 3 years or more, 750+ market days.
So far we have considered four of our seven significant forecast conditions: 1) the Range Index; 2) Credibility of Gain Prospects; 3) Win Odds; 4) Sample Size.
Our 5th concern is over the size of capital loss which might be incurred - the risk dimension. Many years of experience have made clear that our forecasters have tended to underestimate the size of loss likely to be encountered in the downside portion of their basic price range forecast. We have found that a better measure of that concern can be had by looking to actual experience. By averaging the largest price drawdowns encountered during each of the holding periods of the RI sample, there is a recognition that in a crisis situation there may be no ability to hold on to a position to see if some price recovery may be had within the initially expected time commitment of involved capital.
The 6th critical measure is to pit potential capital losses against positive payoff prospects by means of their weighting, using Win Odds and its complement (100 minus the Odds), to combine the good and bad results into a net overall result prospect.
Then, the 7th important measure is to recognize how much time investment may be involved in the combined net result, since an active management program intends each position be reinvested as many times per year as its closeouts permit. The more net return compounding which can be accomplished, the more attractive is the investment security candidate at the time of the capital commitment decision.
A standard measure used in making capital commitment financing decisions is the average RATE of return during the capital’s involvement. That return rate is expressed in “basis points per day” to recognize that capital investment alternatives may have significantly different time and capital investment alternatives. A basis point is 1/100th of one percent. The bp/day measure is a helpful guide to choosing among several equity security re-investments for an actively managed portfolio.
Decision time: A how-to-do-it example
A market-making professional once advised me: “Peter, there are three things you have to respect - God, the Ocean, and the Stock Market”. His point was that no one is going to control any of these forces, so don’t even try.
The investor’s basic strategy ought to accept that unpleasant market events are bound to happen, perhaps at the least opportune times, and separate survival resources need to be sequestered against only that kind of occurrence. Then, the remaining resources should be worked as productively as can be arranged in the time available.
Note that the priority in this strategic arrangement lies with TIME. The mission should be to most likely accomplish the achievement needed in as little time as required. Mission failure could result in survival strategy employment if more time is required than can be had. Time cannot be created or bought, but speed of accomplishments can often be achieved if the need (or benefit) for it is recognized and engineered for in advance.
Where choices of equity investment offer the same or better rewards in lesser time investment with the same or more likely odds of accomplishment, they are the selections to favor. But comparisons of the alternatives need to be made from equal measurements of the dimensions involved. Care must be taken in making those measurements. It is not an easy job, since uncertainty pervades the future, wherein the payoffs lie.
That makes the skills and the motivations of the selector and of the forecaster of paramount importance. While that may seem like a limitation, for the Do-It-Yourself individual investor, in some ways it becomes a simplification. You know best what trade-offs you can stand to make between risk and reward; no committee compromises are needed.
But that puts the onus on the forecaster to provide you with the differences in price-prospect judgments (likely to be encountered) between the securities selections available to you. It all comes back to what the forecaster believes is equally likely to happen to prices of all (or as many as possible) of the alternatives (the market).
The forecaster’s significant role
Who can know this? Only a community of continuously and materially motivated judges acting in their own best interests. It happens, not by accident, that such a community exists.
Over the past, the best part of a century advances in information technology have led, or driven, investment markets to seek transaction efficiencies. Efficiencies permitting the exchange of securities ownership in a matter of moments, and the confirmation of such changing status in minutes or hours, including transaction prices and volumes to be communicated and verified worldwide. A high degree of automation makes this possible for the dominant proportion of the Trillion Dollars of value or more in transactions daily.
But that number of trades largely includes the smaller transactions less likely to move prices significantly, no matter how quickly they may occur.
The big-value ticket trades come from investing organizations with billion-dollar portfolios which need to make changes in significant size in order to have any strategic impact on their overall portfolio values. Such trades would crush the bid and offer trade spreads of the automated-market exchanges.
Instead, such trades have to be negotiated between buyers and sellers of similar scale. That job gravitates to market-making [MM] investment banking firms of the Goldman Sachs (GS), Morgan Stanley (MS), and BAML (BAC) variety. Their collective 100,000+ world-wide information gathering and evaluation employees keep the trading desks up to the minute on value-changing event implications on a 24x7 basis.
What maintains a uniform sense of coming-price prospects in the MM community is the way supply and demand for volume (block) trades is handled. Major buyers and sellers in stocks of interest to these big-time, big-money players rarely complement one another naturally on their coming-price attitudes about specific securities. So, when one group develops an intense interest to buy a stock, the MMs - who know all the major holders and any of them currently inclined to want to lighten up their holdings - there rarely are enough sellers to “cross” equally the demand for shares at prices being bid for the volumes involved.
Under the right circumstances of the market, the MM acting as agent for a buyer may temporarily commit his firm’s capital to short-sell the supply-demand imbalance of the block trade order and borrow shares from an institution eager to lend them for a fee. That will “fill” the buying investing group’s order IF, BUT ONLY IF a hedging deal can be quickly constructed among derivative securities to protect the MM firm’s capital while their short position is at risk of a price rise.
The operating leverages built into derivatives often make these hedge insurance deals economically practical, but the sellers of the protection are in business to make money too. Typically being the proprietary trading desks of other MM firms, they also have well-informed opinions about what needs to be charged for the protection from their side and what the coverage ought to be worth to the MM buyer.
The acid test comes from the fact that the insurance cost of the MM’s capital protection gets built into the trade spread on the underlying block trade order from the MM’s client. If the client feels the cost of the trade (for “market liquidity”) has gotten out of line, he may decide to kill the trade order and wait for some more accommodating market moment that day or next.
For the MM, this block trade order is usually just one of dozens, or even hundreds, trying to get filled that day. MMs typically have little motivation to reduce their reward for putting capital at risk, so they regard trades as opportunities on a fairly equal basis, more conditioned by the client than by the security.
What gets paid for the prospective price-change insurance in each situation describes what knowledgeable buyers and sellers of the protection think is likely to occur during the life of the derivative contracts used to provide the coverage. Here are motivated price forecasters making fair estimates of what likely may be the extremes of each range as seen at the present. Tomorrow’s judgments likely will be a bit different.
But we have a fair starting point for making comparisons among alternative equity portfolio investments. The forecast price ranges and current market quotes provide Range Indexes, and actual experiences in subsequent market days provide the historical reality of how well the MM community has anticipated what the major investing community is likely to do in the next few months.
There can be big differences between price outlooks and actual price-change experiences. Some are due to unforeseen uncertainty, and some are the product of the merchandise (the security) not being seen regularly in this specialized market-making environment. An examination of what happened to the stock’s price subsequently in ALL recent (past 5 years) prior forecasts with similar proportions of upside to downside price-change prospects. The Range Index tells how well this particular security has been forecast by the MM community - and by its principal clients.
Evidences of Forecast Outcomes
Figure 1 has a row of data between its two blue-background pictures. Besides the explicit high and low price extremes seen likely enough to occur within the lifetimes (1 to 3-4 months) of the derivative securities analyzed to produce that range, there are those measures of subsequent actual price discussed above as the Seven Important Measures.
When these measures are produced this day in exactly the same way for all of the possible choices the DIY individual investor might entertain, the comparison job can be made “personal” to his/her preferences. Figure 2 illustrates a top-ranked segment of the day's 2,766 equity securities (including ETFs) currently offering credible price range forecasts, with these measures aligned with those of CRY.
In addition to the seven important measures, some useful comparison data is present here.
The Win Odds and its complement (100 – column H) are used to weight the reward [I] and risk [F] columns in columns [O] and [P], which net into column [Q] as an odds-weighted net reward-risk payoff measure. Then, that column is combined with the average holding period times in each security row of column [J] to produce a rate, or “speed”, in column [R] of price-change gains in basis points per day terms. A gain of 19+ bp/day is equivalent to a CAGR of +100%
Figure 2 is the column [R]-ranked top-most segment of the 2,766 equities for which we have credible MM price-change ranges on this day. There are over 40 securities with Odds-Weighted reward~risk trade-off multi-year histories recording net gains at a rate equivalent to 100+% CAGRs, while SPY, the SPDR S&P 500 index ETF, averaged a CAGR of +8%.
The one of those capturing the most attention is CRY, with Win Odds of 97%, the highest (most favorable) odds of the top dozen investment candidates, and is surpassed by only two of the top two-dozen candidates. CRY’s investment profitability odds are substantially better than the average Win Odds of the top-20 candidates with the most-likely, rapid near-term % gains (bp/day). Those odds contribute strongly to CRY’s column [R] score of 39 bp/day, compared to the top-20’s 21.6 bp/day.
The attractiveness of CRY is large across nearly all of the 7 important dimensions. At its now RI of 10, the credibility of its upside price-change forecast of +19.3% is supported by Realized Payoffs [I] of +17.5% (net of losses), a ratio of 0.91, compared to the 20-best bp/day competitor of 1.00, where the 1.00 is a forecast of +11.3%.
On the negative side, CRY forecasts have experienced worst-case losses during following holding periods averaging -4.4%, compared to best-20 alternative prospects of -6.1%.
When holding period time required to generate annual rate of return [CAGR] [K] is included, the top-20 experience of 39 market days is shorter than CRY’s 43, but so is its Realized Payoffs of +10.8%, compared to the +17.5% of CRY. That measures out to a CAGR of +156% for CRY, compared to the competition’s +102%.
In the Figure 2 array of other investment choices, there are some alternatives which might be more satisfying to investors with particular preferences as a matter of style or circumstances of need. But where the objective is to attain the most likely, quickest, most substantial gains for a portfolio with the least risk of loss in comparison to the gain, Cryolife, Inc., by these measures, appears to be a most satisfying "Buy" selection.
Final Note: In the very next day following this analysis, the price of CRY stock rose by +1.46% to $29.97. Its attractiveness was begun to be realized overnight, and investors with these insights had an important initial advantage. No guarantees, but as the redacted (can you find Amazon (AMZN)?) Figure 2 illustrates, each market day there are dozens of attractive alternatives to choose from, given the carefully measured results of prior forecasts.
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, but may initiate a long position in CRY over 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.