Security Nuts and Bolts in Milwaukee
Brady Corporation (BRC) manufactures and supplies identification solutions [IDS] and workplace safety [WPS] products to identify and protect premises, products, and people in the United States and internationally. The IDS segment offers safety signs, pipe markers, labeling systems, spill control products, and lockout/tag out devices for facility identification and protection. The WPS segment provides workplace safety and compliance products, such as safety and compliance signs, tags, labels, informational signage, asset tracking labels, first aid products, industrial warehouse and office equipment, and labor law compliance posters for various industries.
Boring? You bet. Until you find that the Brady Corporation stock currently sells at a price 10% below where Market-Makers hedging shorts on BRC think its price could easily rise to – or beyond.
When that has happened before (20 times in the last five years) the stock did make such a rise in all but one instance. And in that case the loss was probably not as bad as -4%, the worst interim experiences on the way to an upside MM forecast of over +10%. Those 20 occasions gained an overall average (including the loss) of +10.7%.
Could there be another +10% gain this time?
No guarantee. But the odds of 19 out of 20, or 95% out of 100% are rather reassuring.
Is this just a weird situation?
Not hardly. Every market day we monitor about 3,500 stocks and ETFs, to see how the Market-Makers [MMs] protect themselves while making it possible for institutional investors to transact in volume blocks of shares. Their hedging activity in some 2,500 equity securities indicate what that community of extremely well-informed professionals thinks can happen to prices in the next few weeks and months. (They are kept well-informed on a 24x7 basis by their over 100,000 world-wide information-gathering employees.)
Careful records are kept of their implied forecasts and of the changes in market prices over the next 3 months, subsequent to each forecast. Every day we see that forecasts for a few stocks have histories like BRC, where 90%+ of prior forecasts like the current day have had profitable experiences.
Figure 1 shows how today’s 20 top-ranked stocks present themselves, including BRC. The identities of those stocks which subscribers to these lists are paying for have been redacted out of respect for their patronage. But the nature of the forecasts and the historical outcomes of prior forecasts are current and factual.
The purpose of this display is to provide comparisons of the forecast and historic data for Brady Corp. with other favorably-ranked stocks of the day. Let’s take a look at what (to us) constitutes an attractive near-term investment proposition, where capital gain is the objective.
The columns [B & C] are the 6/11/2019 MM forecast price range possible (and likely) in the next few weeks and months. [D] is this day’s closing price. [E] calculates how far each stock might rise between [D] and [B]. All other columns are recorded history.
The histories are drawn from the past 5 years of daily market records, all 1,261 days where available. But only for those days where the forecast had the same upside-to downside price change prospect proportions as this day’s forecast.
Using BRC data, the +10.2% upside is about 4 times the downside between today’s $47.64 and its low forecast of $46.46. That downside is 19% of the whole forecast range between $46.46 and $52.48. Our measure of where BRC’s current price is, relevant to its forecast range, is a Range Index [RI] of 19 in column [G]. Column [L] shows that 20 forecast days in the past 5 years have had RIs of 19, out of a total available forecast history of 1,261 days. This is a relatively small sample but large enough to avoid being an accidental set of observations.
We intend to use the MMs’ self-protective actions as guides to how far they believe securities prices might move, both up and down. But their actions are taken in derivative contracts, which unlike stocks have limited legal lives. So we set holding period time limits on investment positions taken, based on what might reasonably be reflected in those contracts. We use an arbitrary 3-month limit in all cases.
Our portfolio management discipline demands a position taken due to a forecast be held until the security’s price reaches the top of its forecast range or until 3 months have elapsed since the forecast was made. Once a price target is reached, the position is closed and the expanded capital is immediately reinvested. If a time-limit is reached instead, the position is closed regardless of gain or loss, and the liberated capital is reinvested the next day.
Risk is defined under this discipline as potential exposure to unexpected forced sale, and Reward is defined as the defined earliest-opportunity profit taken. Time is an invested resource in both types of outcomes. Time is a powerful compounding multiplier of gains taken, and provides an opportunity for price recovery in situations where price has declined below position entry cost.
A position’s Reward is easy to record, being the gain achieved, in the time period required to achieve it. The customary score is kept in basis points per day of the capital’s commitment (bp/day), where a basis point is 1/100th of a percent.
A position’s Risk, containing uncertainty, is not so easy. We look to the worst-possible event to occur at the worst-possible point in time. Our standard is an unexpected forced liquidation of the position at its greatest price drawdown below the position’s entry cost. To identify that price we monitor position holdings during their full open periods to find the largest such drawdown, as is shown in column [F], the average of all positions in the sample.
To measure the Reward of a sample of positions we take the average net gains of all positions in the sample, including losses. For BRC that has been +10.7% as shown in column [ I ]. Likewise, the average time (market days) consumed by the sample’s positions, 46, is shown in [J], and its impact on the annual rate of gain at +74% is shown in [K].
Those approaches make the Win Odds of column [H] quite important in comparing the attractiveness of one investment selection with others. Figure 1 rows of alternative investment selections are ranked on descending [H] values.
[H] Odds-weighting of the Reward [ I ] and 1-[H] weighting of Risk [F] provides [O] and [P] values which may be combined into a single Odds Net in [Q]. Converting the [Q] percentage values into basis points per day by applying [J] furthers the alternative investment selection procedure.
To have a means of conversion reference between bp/day and CAGR, a bp/day of 19+ when sustained for a year produces a CAGR of 100%. BRC registers at a bp/day of 21.
Visualizing the forecast trend
Figure 2 puts today’s MM price-range forecast into a picture form allowing us to compare it with prior-day forecasts for BRC daily during the past 6 months.
The vertical lines span the daily price range forecasts being made by actions of market-makers, with today’s forecast at the right hand edge. The heavy dot of the day’s closing price separates the ranges into upside and downside prospects.
The row of data in Figure 2 is largely the same as appears in Figure 1.
A Range Index of 19 is not the lowest, but the “thumbnail” distribution of RIs clearly shows a current price below the most frequent comparison to prospects of likely coming prices.
A look at column [R] should reinforce the notion that this screening of near-term equity investment opportunities so identified by Market-Maker behavior forecasts puts Brady Corporation among the most attractive possible candidates for a capital commitment today.
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 1100 profitable position closeouts at +140% annual rates.
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.