- Not for a long-term hold; this may be a three-month or less position while DIOD catches up with other semiconductor stocks.
- DIOD’s odds-on prospect has a history of capital gains in six out of every eight prior forecasts with likely upside-to-downside balances like today, at net CAGRs of +75%.
- Compared to dozens of other semiconductor stocks (not just AVGO), it’s way ahead on the Reward vs. Risk scale.
- This is another example of making profit while the rest of the group’s leading stocks are resting. But MMs only were right six of every eight of the past five years' 51 such forecasts, so no guarantees. Just good odds.
Active Investing strategy involves anticipating coming prices; Passive Investing strategy (buy&hold) involves celebrating continuance of a hoped-for past-price "trend".
This article takes the self-protecting current hedging actions of Market-Makers (MMs) accomplished in open markets for derivative securities as competitively-vetted forecasts of near-term coming price prospects. When realized, reinvested gains compound into CAGRs far above market averages or other passive strategies.
Historic evidences of outcomes of prior MM forecasts provide the means of evaluating price-loss risk experiences against price-gain achievements in selecting odds-on choices to further the aim of capital-gain wealth-building portfolios.
Diodes Incorporated (NASDAQ:DIOD) appears now to be such a candidate.
Another day's step in the march of technology making humankind's life more desirable. But with the important economic benefit for adroit investors of high RATE of capital gain, using DIOD. Here's how the company is viewed via Yahoo Finance:
"Diodes Incorporated, together with its subsidiaries, designs, manufactures, and supplies application-specific standard products in the discrete, logic, and analog and mixed-signal semiconductor markets in Asia, North America, and Europe. It primarily focuses on low pin count semiconductor devices with one or more active or passive components. The company offers discrete semiconductor products, such as performance Schottky rectifiers and diodes; Zener and performance Zener diodes, including tight tolerance and low operating current type; standard, fast, super-fast, and ultra-fast recovery rectifiers; bridge rectifiers; switching diodes; small signal bipolar and pre-biased transistors; MOSFETs; thyristor surge protection devices; and transient voltage suppressors. It also provides analog products comprising power management devices consisting of AC-DC and DC-DC converters, USB power switches, and low dropout and linear voltage regulators; linear devices, such as operational amplifiers and comparators, current monitors, voltage references, and reset generators; LED lighting drivers; audio amplifiers; and sensor products, including hall-effect sensors and motor drivers. In addition, the company offers standard logic products comprising low-voltage complementary metal-oxide-semiconductor (CMOS) and high-speed CMOS devices; ultra-low power CMOS logic products and analog switches; multichip products and co-packaged discrete, analog, and mixed-signal silicon in miniature packages; silicon and silicon epitaxial wafers; and crystals and oscillators. It sells its products to the consumer electronics, computing, communications, industrial, and automotive markets through direct sales and marketing personnel, independent sales representatives, and distributors. Diodes Incorporated was founded in 1959 and is headquartered in Plano, Texas."
Who knows what coming stock prices will be?
No one, for sure. But Market-makers (MMs) have to make educated guesses hundreds of times each market day.
It's the classic case of decisions under uncertainty. Their risks are reduced by hedging, the act of buying price-change insurance. What they will pay and how the hedge is structured tell just how far they think the hedged-stock's price is likely to go.
That answers much of the first of three important questions: How big a change is likely?
The other two are "how likely is it to get there?" and "how long may it take?" Answers to these are suggested by how well the MMs determine the first question, by real market prices subsequent to the hedge deal.
MMs don't come to a big-$ fight armed only with hearsay-fantasy notions.
Some 100,000 or more world-wide employees of MMs (38,000 at GS alone, plus 60,000 at MS) collect information on a 24x7x365 basis for in-house evaluation and market-making decisions. By humans, so they're not error-free; by the ever-present uncertainty of the future.
But their guesses are among the best to be had and provide a score-keeping history from which to base personal-preference choices. Figure 1 provides some competitive alternative semiconductor investment prospect price Reward vs. Risk trade-offs. Including five stocks Yahoo Finance finds investing-information-seekers also explore along with DIOD.
This map locates securities at the intersection of prospective price gains (green horizontal scale) and potential price drawdowns (red vertical scale) based on market-maker hedging behavior to protect their necessary endangerment of firm capital as they enable volume trades. Desirable conditions are down and to the right.
While Figure 1's comparisons provide a perspective on many of this group's alternative investment candidates, several conditions contribute to reward and risk. Principal questions for both are "how likely are these to happen", and "can their impact be improved?"
Figure 2 presents the MMs' price range forecasts and the histories of all outcomes from those of the same up-to-down prospects in the past five years of daily forecasts for the five best of those ETF candidates.
Figure 2 is row-ranked on [R]'s fom and distinguishes DIOD's capital gain prospects from nearly all of the others. AVGO on this scale today is an also-ran; next week/month?
Contrasting this table presents data on the five best odds-on ETFs most likely to produce satisfying RATES of capital gain under the portfolio management discipline known as TERMD, explained by article How To Better-Than-Double Your Capital Gains (From Stocks Alone) By Using TERMD Portfolio Discipline in my SA blog.
That discipline seeks the largest, most likely, quickest to be captured net capital gains with the least interim exposure to price drawdown on the way to target reward attainment.
Contributing to that evaluation are the demonstrated odds of a profit-successful forecast in column [H], its complement of 100 - H, or loss frequency, size of net gain attained [ I ] and size of worst loss experience [F] so that when appropriately weighted in [O] and [P] they produce the Net of [Q]. Respecting the power of compounding, [Q] converted into basis points per day [J] of capital commitment at [R] presents a highly comparable figure of merit (fom) for investing preferences.
[S] presents a simple measure of the size of the MMs' forecasts as an indication of the presence of future uncertainty. BTW, the ACIA numbers are believed to be the result of bad data.
DIOD and AVGO
Figure 3 provides a visual comparison of the trends of MM-hedging price range forecasts daily of the just-past six months. The heavy dot in the vertical-bar ranges is the closing price on the day the forecast was made. It splits each forecast into upside and downside price change prospects.
The forecast ranges at the right-hand edges of each picture tell each stock's current trend, with DIOD's price quote dot low in its forecast range, at a Range Index [RI] of 13. AVGO is higher at a forecast RI of 23, four times as much opportunity for its price to rise as to decline. DIOD's proportions have eight times as much room to rise as to decline.
How likely to rise or fall is suggested by the small lower pictures of RI frequency in the past five years of 1,261 daily forecasts. DIOD has far more past experiences of higher prices (and RIs) than lower ones, while AVGO's outlooks have been pretty much 50-50 upside to lower side.
What matters most is DIOD wins better than 6 out of 8 forecasts, while AVGO only wins a profit in 6 out of 10. That shows up in DIOD producing realized payoffs of +10.8% on average while AVGO nets only +3.6% from its RI forecasts like today's.
Diodes Incorporated offers far better odds for gain than Broadcom Inc. A present portfolio holding of the latter could benefit from an interim replacement by DIOD. Neither is a very competitive contestant for inclusion in a capital-gain oriented portfolio among most current candidates, especially among the best 20 among over 2,800+ of stocks having MM forecasts.
This article was written by
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in DIOD 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.
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
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.