Big-volume “block” stock trades require negotiated off-exchange-floor “facilitations” of market liquidity by market-making firms to promptly balance supply-demand disparities as market anticipations evolve. The resulting MM capital risks are hedged by deals in derivative securities to offset price changes in the underlying stock until those temporary positions can be unwound.
The derivatives transactions reveal the coming price-range expectations of the MM community. History of prior hedges and subsequent market price changes provide odds for potential price-change gains this time around.
Current market prices compared to expected price extremes offer significant upside price change prospects for Medpace Holdings, Inc. (NASDAQ:MEDP) compared to other current medical diagnostic and research stocks.
“Medpace Holdings, Inc., a clinical contract research organization, provides scientifically-driven outsourced clinical development services to the biotechnology, pharmaceutical, and medical device industries worldwide. The company offers a suite of services supporting the clinical development process from Phase I to Phase IV in various therapeutic areas. The company also provides bio-analytical laboratory services, clinical human pharmacology, imaging services, and electrocardiography reading support for clinical trials. Medpace Holdings, Inc. was founded in 1992 and is headquartered in Cincinnati, Ohio.”
Source: Yahoo Finance
The advantage of Market-maker forecasts is that by indicating the extremes within which near-term coming prices might occur we have a clearly-defined balance between stock price risk and return which is absent from most vacuous investment forecasts. Their risk is described either in non-quantitative generalities or in theoretical abstracts like “beta” which misuses the statistical measure of standard-deviation of stock prices from their longer-term trend. Unfortunately, that contains both positive and negative variations, and there is no way to separate the two.
Here we extract direct measures of expected price changes separately between upside and downside, based on real-money bets being made in hedging actions taken to protect MMs as they commit firm capital to acquire shares of specific stocks to satisfy volume institutional block trade orders.
Each market day we examine the MMs’ Range Index prospects for over 4,500 stocks and ETFs. Some two thousand have no credibility and are discarded. The remainder are categorized historically by their current RIs to determine what has happened to them in prior market experiences like those of today. Figure 1 pits MEDP against the S&P500 index Trust ETF (SPY) and other healthcare research and diagnosticians.
(Used with permission)
The tradeoffs here are between near-term upside price gains (green horizontal scale) seen worth protecting against by Market-makers with short positions in each of the ETFs, and the prior actual price drawdowns experienced during holdings of those ETFs (red vertical scale). Both scales are of percent change from zero to 25%. Desirable locations are down and to the right.
The intersection of those coordinates by the numbered positions are identified by the stock symbols in the blue field to the right. The 'market-average' notion SPDR S&P 500 Index ETF at location  provides a sense of trade-off norms. MEDP at  is our principal focus.
The dotted diagonal line marks the points of equal upside price change forecasts derived from Market-Maker [MM] hedging actions, and the actual worst-case price drawdowns from positions that could have been taken following prior MM forecasts like today’s.
This map is a good starting point, but it may only cover part of the investment characteristics that often should influence an investor’s choice of where to put his/her capital to work.
Figure 2 presents the MMs' price range forecasts for our principal-interest investment candidate and their competitor alternatives, along with the histories of outcomes from the prior forecasts having the same proportions of upside-to-downside prospects as today's.
Principal questions for all alternatives are “how likely are these outcomes to happen,” and “can their impact be improved?”
Figure 2 presents the MMs' price range forecasts [B] to [C] for the alternative investment candidates in Figure 1, along with the outcomes [ I ] from their prior past 5 years of daily forecasts with the same proportions [G] of today’s up-to-down Range Index prospects.
Used with permission
Contributing to that comparison 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 [F] experienced in prior holding periods, so that, when weighted appropriately 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 where the dominant objective is to build easily liquidated capital to meet emergency, retirement or other planned needs.
By its use as a ranking, the figure of merit (fom) [R] for each row provides an additional measure of attraction, emphasizing the capital gain potential for MEDP. Since the [H] odds on wins vs. losses and the [J] holding periods impact [R], the size of samples from which past outcomes are drawn need careful scrutiny but are comparable for all types of equity investments.
Note also please the comparison of these stocks with the S&P500 index-tracking ETF and with the 3300+ securities average for which we compile equity specifics. From that population we use the dimensions illustrated in Figure 2 to rank the most promising and historically evidenced 20 stocks at present, all based on prior MM forecasts with upside-to-downside balances like today’s.
In Figure 3 are outcome comparisons of the prior MM price-range forecasts having Range Indexes similar to those of today. Its visual comparison of competitors is focused on size of potential payoff and on probability of profit resulting shows a quite different outcome likely.
Used with permission
The orientation of this visual is like that of Figure 1, where desirable is down and to the right. Here MEDP is the outstanding prospect at location , with odds of over 99 out of 100 and payoff potential > +20%. Again, it is based on the same hedging actions as all other mentioned equity price prospects.
Investing, like the rest of life, is laden with trade-offs. Each investor has preferences and personally-set standards of acceptability. Each investment security candidate for the portfolio has its line-up of advantages and disadvantages to be presented to the investment committee. With an individual investor’s committee of one, the decisions may come more easily than when there are other minds to convince.
Like many stocks agitated by Covid 19 and variations, MEDP has had its overreactions and now with a world more certain of its recovery attentions turn to international belligerences. But based on four years of daily price range forecasts prompted by investors eager to benefit from medical and biological progress, a search for further stock price growth may be ready for recovery from the past 3 months of gentle decline.
At least the past week’s sudden decline may be indicative of better prices to come. The reactions of many institutions may be welcoming the departure of some too-lately fans who could not relish declines in both price quotes and price expectations, to the point where entire holdings of the issue have been dismissed. It often takes that attitude to produce a one-day drop of over -20%.
But the suggestion is strong that the panic is not widely shared, since downside price expectations have largely disappeared since the drop, while upside prospects widened markedly, up from the new low quotes.
The vertical lines of Figure 4 are not like the pure history of “technical analysis”. Instead, they are graphic representations of coming-price uncertainties of both the best and worst anticipations. And the row of data between the large and small pictures is much more than a hopeful speculation that something like today’s price activity might represent good news for tomorrow.
Indeed much of that data row compares the balance of up-to-down current price prospects with those of the past 4 years 1035 daily MEDP stock price-range forecasts of the MM community. Today’s balance is of further-down outlooks taking only 4% of that full range, while the 96% “remainder” is rather optimistic. Indeed, the upside is in excess of an +18% gain, compared to concern of a less than -3% downside.
And where our “behavioral analysis” out-reasons the “technical” speculations, we use the history of how prior forecasts like today’s actually performed in earlier subsequent markets. Unfortunately, most “technicians” usually have little evidence to support old assertions that something wonderful – or scary – may be ahead. One or two examples are the usual justification for their forecasts.
Here we have 13 prior instances of today’s Range Index of 4 (that 4% of the full range below today’s price) and wonder of wonders, all 13 were profitable, reassuringly at a scale beyond today’s +18% forecast, earning at a near- +23% simple gain in an average of 30 days (6 market weeks). Repeated 8+ times in a year that compounds into an overall gain of +450%.
Now, you may say, well from over 1000 forecasts you maybe could cherry-pick 13 to prove anything. But the small lower picture of Figure 4 shows the frequency of each level of those forecasts RIs. The good performances of the 13 on the left end of that frequency distribution were produced by the subsequent outcomes of the rest of the array as more normal forecasts pushed prices higher, where forecast-indicated sell-price targets were reached.
In comparison with several other medical diagnostic competitors, the above data strongly suggests investment in Medpace Holdings, Inc. at this point should produce satisfying capital gains.
For the investor intent on wealth-building her/his portfolio, from this set of appraised prospects, Medpace Holdings, Inc. appears to be the dominant choice in a portfolio managed under the TERMD discipline. It is far above the over-3300 securities forecast population of other stocks, and is well above the S&P 500 Index ETF prospects at its present appraisal.
Still, these are calculations based on past outcomes from then-future expectations of other knowledgeable investors, made under likely somewhat different circumstances. No guarantees, just best estimates.
Additional disclosure: Peter Way and generations of the Way Family are long-term providers of perspective information (earlier) helping professional 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 their guidance what the arguably best-informed professional investors believe, revealed through their own self-protective hedging actions, 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 at our SA blog. Our website, blockdesk.com has further information.
This article was written by
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in MEDP 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.