The investment thesis of this article is that a most important reason for investing in any stock is its potential for portfolio wealth-building and that requires informed forecasts of its likely future price. Abiomed Inc. (NASDAQ:ABMD) now scores better than all other Medical Equipment & Supply stocks with odds-on near prior gain experiences. And it is competitive with the top 20 ranked Market-Maker near-price forecasts. Other stocks of the industry group also offer large near price gains: DexCom, Inc, (DXCM), Edwards Lifesciences (EW), and Quidel Corporation (QDEL).
This is an analysis of how the prices of specific securities are likely to change in the next 3-4 months, based on the way major investment organizations ("institutional investors"or "big-$") have perceived those prospects and made multi-million-dollar trade changes of holdings in their multi-billion-dollar portfolios. That rationale is explained further in my SA blog’s article “Why Read This Report?”
It is not a study of years-plus effects of economics, technology, politics, or competitive use of resources on earnings per share of securities. Such studies by others are embedded in the big-$ forecasts, prompting their volume-trade transaction orders.
This is a comparison of present-day opportunities for capital gain among many related alternative choices for wealth accumulation as seen by investors with the capital and human resources sufficient to cause such price changes.
Portfolio wealth-building not an interest? Then spend your reading time elsewhere.
The price-forecaster’s foe is uncertainty. Another too-big-to-die industry leader is being seriously challenged. How quickly it can adapt to operations approaching the potential of prior attraction for investors is at this point in time uncertain. But the haze likely will clear only over many coming months, and investment decisions need actions right now.
We suggest that the best time horizons for wealth-building decisions be a few months at a time, with actions taken incrementally as the picture changes, not long-term buy&forget. Expect surprises.
Market professionals are alert to the evolving developments, supported by thousands of 24x7 world-wide employee situation-observers and competition-evaluators. They can be useful guides, not only for their employers, but for us as individual investors – in the way they influence the thinking of the market pros.
Readers familiar with our work may want to skip to the Comparing Details heading below.
This article rewards investors who choose to direct their investments of time and capital to those alternatives with the highest likelihood of successful rates of return among ones compared under identical important measures.
These are questions often neither asked nor answered by many investment analysis reports. The commonplace approach is to present those aspects of one investment which may set it apart from others, but fail to make the essential decision-supporting step of comparing alternatives on an equal-measure basis.
To get answers we look to the best-informed market participants – the market-makers [MMs]. These are the dozen to two dozen firms providing price quotations to exchanges and transaction systems as a result of their extensive 24x7 world-wide information collection systems and evaluation resources. It is a community of perhaps 100,000 employees. The largest, Goldman Sachs employs over 35,000 full-time.
Present-day markets are driven by major investing organizations commanding multi-billion dollar portfolios with stock contents which can only be adjusted by negotiated volume (block) trades between peers, not by “open auction”. Such trades set and move public posted prices.
The individual investor typically is merely along for the ride. He/she needs to have a sense of where the negotiators are likely to head, price-wise.
Conventional analysis often provides superficial descriptions and little linkage between operating minutia and price forecasts. As examples here is how Yahoo Finance reports on ABMD:
Abiomed, Inc. engages in the research, development, and sale of medical devices to assist or replace the pumping function of the failing heart. It also provides continuum of care to heart failure patients. The company offers Impella 2.5 catheter, a percutaneous micro heart pump with integrated motor and sensors for use in interventional cardiology; and Impella CP, a device used by interventional cardiologists to support patients in the cath lab and cardiac surgeons in the heart surgery suite. It also provides Impella 5.0 and Impella LD, which are percutaneous micro heart pumps with integrated motors and sensors for use primarily in the heart surgery suite; and Impella RP, a percutaneous catheter-based axial flow pump. In addition, the company engages in the development of Impella 5.5 and Impella BTR that are percutaneous micro heart pumps with integrated motors and sensors; and Impella ECP pump that is designed for blood flow of greater than three liters per minute. It sells its products through direct sales and clinical support personnel in the United States, Canada, Europe, and Asia. The company was founded in 1981 and is headquartered in Danvers, Massachusetts..
source: Yahoo Finance
The stock price forecast data used in Figure 1 comes from the hedging actions of MMs. These are the stocks most used by institutional investors.
They are substantial capitalization stocks which Institutional Investment organizations’ researchers and portfolio managers watch closely, as do individual investors. Note columns [U] and [V] of Figure 3 when it is presented.
Most individual investors in their personal transactions will not impact the market to the same extent as the institutions. But we do share in the benefits (and risks) of the institutions’ presence in securities’ market quotes.
Figure 1 compares how the MMs translate their big-money clients’ appetites into upside-to-downside price change prospects, and what that has meant in the past regarding price drawdown exposure on the way to the upside target.
This map locates securities at the intersection of prospective price gains (green horizontal scale) and potential price drawdowns (red vertical scale) based on forecasts from market-maker hedging behavior to protect their necessary endangerment of firm capital as they enable volume trades. Desirable conditions are located down and to the right.
Our particular interest is in ABMD at location , but also DXCM at , EW at , and QDEL at . Location  encloses the market index SPDR S&P500 Trust ETF (SPY).
The severe limits of the Figure 1 tradeoff proposition deny much of any reasoning to answer the question of WHY we see what we do. To further enrich the understanding of recent trends in MM forecasts for ABMD, consider Figure 2:
The vertical lines in this picture are not actual past market prices like those seen in “technical analysis charts”. Instead they are forecasts of likely future ranges of market stock prices implied as probable in coming weeks and near months. The heavy dot in each vertical is the market close price on the day of the forecast. It splits the forecast range into upside and downside price change prospects.
The imbalances between up and down potentials are what are useful in estimating both coming price direction and extent of change. Their proportions are measured by the Range Index [RI]. Its measurement quantity is the percentage of the whole forecast range which lies below the current market quote. A 20 RI has 4 times as much upside prospect (the other 80%) as down. A 33 RI has only 2 times as much upside potential as downside.
Segregating past MM implied forecasts by their RIs produces clues to how market prices have reacted to the conditions seen by the MM community at various points in time. We use a 5-year sliding window to count how many prior forecasts (the sample size) have been like the current Range Index.
The small “thumbnail” picture in Figure 2 shows how these RIs have been distributed daily over the past 5 years. ABMD’s current level of a 49 RI has equal prospects for upside and downside price changes in coming weeks and months.
So, why highlight ABMD as a great opportunity?
The essence of valuation is in comparison, which requires that the compared measures be as close to identical as possible. To that end we place all of our valuations in a carefully defined set of measures, and describe them in as parallel set of comparisons as is possible.
To do so often presents what many readers recognize as text and ideas they have encountered before, as they have in our just-published comparison between Microsoft and Boeing. The use of the heading for this section of the article as an accelerant to reading provides for experienced readers an economy of time and effort, while leaving for the newly-initiated the opportunity for an important introduction.
What is important to us in this analysis is how big a price gain is in prospect, column [E], and how likely is today’s RI forecast to produce a profit [H] as a proportion of the [L] sample of such forecasts. ABMD’s near loss-free experience is joined by two other medical equipment competitors in column [H].
That combination result appears in the [ I ] %payoff which includes loser prior forecasts as well as the percentage gains of winners, notable for several of the others. The size of [ I ] relative to [E] is a measure of [E]’s credibility in [N]. Again, the top 3 stocks’ performance (at this level of its RI) is an advantage in this element of the investing contest for commitments of portfolio capital.
Time required [J] to accomplish the payoff is another important dimension for any investment mission. The retirement, tuition, or health emergency clock won’t patiently wait for “long-term-trend” investments to be “sure” (like Eastman Kodak (KODK), General Motors (GM), General Electric (GE), or others) of their “passive investment” buy&hold strategy results. Compound Annual Gain Rates [CAGR] are the essential measures [K]. Figure 3’s rows are ranked by the historical results (of today’s RI) statistic.
One additional complication of being time-efficient in an investment strategy is that the score-keeping can’t be easily sliced up into uniform time periods. That is not what happens to holdings in an active investment strategy. Gains (and losses) occur in irregular lumps of time, and we need to evaluate likely prospects in the way they may be accumulated.
What is done in proper financial analysis of any capital commitment is to anticipate the RATE of gain or cost in units of change per time of involvement. The most commonly used measure is basis points per day, where a basis point is 1/100th of a percent.
That’s a tiny unit, but is what works best. Put together and maintained each day for a year, 19 of them would double your investment. They can be powerful.
In Figure 3 we use the Odds of gain [H] as a weight for the average prior payoffs [ I ], and take the complement of [H] ( 100 – H ) as a weight for the risk prospect [F]. Put together as [O] + [P] in [Q] we have an odds-weighted net outcome of each row’s prior MM RI forecast sample [L]. Then by converting those [Q] nets into bp/day in [R] we have a guide to making investment selection decisions across a broader array of alternatives.
Using [R] as an integrated measure of wealth-building desirability places ABMD in first place by a wide margin among most other Medical Equipment and Supply stocks. Its 76 bp/day score is far above what the most widely of interest stock in the group, Becton, Dickenson & Company (BDX) offers, 1.6. The market index ETF, SPY, at this time produces a -0.9 bp/d prospect.
Part of ABMD’s appeal comes from its high Realized Payoffs from prior forecasts at the Range Index of 49. The payoff experiences of most stocks are not linear to their Range Index values, and do not have highly uniform characteristics. A look back at the Figure 2 small-picture of ABMD’s Range Index distribution over the past 5 years is revealing.
It shows that ABMD’s RI frequency peaks at around 30, typical of many stocks, and rarely gets above 50. What happens between its now 49 and those few remaining higher RIs is rising prices, often (here usually) reaching the top-of-forecast ranges of those 49 RI forecasts. Consider it momentum, perhaps. But it has occurred in nearly all 53 of the ABMD cases of prior 49 RIs. And the %Payoffs actually achieved, on average, in the 53 cases were nearly as high (+14.8%) as the forecast average of +14.9%.
But the nature of momentum-stock plays reinforces the reality of their temporary nature. Thus, once a sell target is achieved, the position should be liquidated.
Winning 52 of the 53 prior RI 42 forecasts places its Realized Payoff average at +14.8%, better than most others. When that Win Odds ratio of 98 with little degredation occurs the odds-weighted net of +14.5% is well above that of SPY, at -0.5%. Their differences in CAGRs of +497% and +12% without odds weighting are significant. The difference is importantly due to the short holding periods required to attain sizable price-change gains.
ABMD now competes effectively in the broad population of MM forecasts for 2701 stocks, ETFs and market indexes. Its 76.1 bp/day is nearly three times the best-20 ranked set of securities which averages 28 bp/day.
Within the Medical Equipment stocks a comparison of ABMD on the basis of its current RI forecast odds of profitable outcome and the prior average size of those outcomes is dramatic. Please see Figure 4. Again, as in Figure 1, the favorable directions of the map are down and to the right.
The map includes SPY as a “market index average” at . ABMD at location  is a clear favorite at its current reward~risk balance among the Win Odds and net Payoffs of the other Medical Equipment stocks at their current reward~risk expectations. But DXCM at , QDEL at , and EW at  have combinations of appeal which may be more attractive to some investors.
Nothing requires market experiences of the past to be repeated, but they form an auditable prices-record to be referenced. Referenced in the same way, issue by issue, regardless of the varied underlying specifics of the corporate competitions going on. What matters on the portfolio scorecard is told by the ongoing aggregate prices of what is, and has been, held.
Abiomed, Inc. (ABMD) is a highly attractive near-term capital-gain buy with a realistic +15% upside target which often has been attained in only four weeks. It may prove to be a better interim speculative holding vehicle than any other stock in the market’s extensive population of issue forecasts in the next 2-3 months.
There are a number of better-ranked prospects in our MM forecast population than others in this group at present. For additional information check my SA blog.
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.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
This article was written by
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in ABMD 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.