The “fundamentals” of evolving information technology and competition makes staying current in most fields an intensive, full-time job. That leaves bored individual investors often excluded from that necessary part of the value analysis.
Instead, competent and experienced full-time employee analysts at big-$ investment “institutions” keep track of those developments while others at the firm integrate the investment industry moving parts into capital-commitments of desired share-holding trades. Then Wall Street Market-Makers take over to find “other side of the trade” balancing partners at other institutions with their own reasons for actions.
In the process risks must be taken and protected against, where predictive markets by their hedging-deal pricing translate expectations into bounds of coming share prices, both to the upside and the down. The market’s subsequent actions put win vs. lose odds on those expectations.
“Wells Fargo & Company, a diversified financial services company, provides banking, investment, mortgage, and consumer and commercial finance products and services in the United States and internationally, operating through four segments: Consumer Banking and Lending; Commercial Banking; Corporate and Investment Banking; and Wealth and Investment Management. It also operates through financial advisors. Wells Fargo & Company was founded in 1852 and is headquartered in San Francisco, California.”
Source: Yahoo Finance
“American Express Company, together with its subsidiaries, provides charge and credit payment card products, and travel-related services worldwide. The company operates through three segments: Global Consumer Services Group, Global Commercial Services, and Global Merchant and Network Services. Its products and services include payment and financing products; network services; accounts payable expense management products and services; and travel and lifestyle services. American Express Company was founded in 1850 and is headquartered in New York, New York.”
Source: Yahoo Finance
These growth estimates have been made by and are collected from Wall Street analysts to suggest what conventional methodology currently produces. The typical variations across forecast horizons of different time periods illustrate the difficulty of making value comparisons when the forecast horizon is not clearly defined.
Let’s consider selections from an “Opportunity Set” of comparable companies ranging from most to least attractive. Among the active participants are two in which we have an interest, WFC and AXP.
Here in Figure 1 is how the markets currently appraise their Reward ~ Risk trade-offs among competitors, based on behavioral analysis of (what investing systems require to be done, not of emotional investor errors) -- actions by Market-Makers [MMs] as they protect their at-risk capital from possible damaging future market-price moves.
(used with permission)
Their actions are essential to the conduct of irregular large-volume “block trades” which are the frequent movers of stock prices, rather than the continual small-volume traffic of the “investing public” individuals. Upside price rewards are from their potential reward forecasts, measured by the green horizontal scale.
The risk dimension is of actual price drawdowns at their most extreme point while being held in previous pursuit of upside rewards similar to the ones currently being seen. The risk exposures are measured on the red vertical scale.
Both scales are of percent change from zero to 25%. Any stock or ETF whose present risk exposure exceeds its reward prospect will be above the dotted diagonal line. Capital-gain attractive to-buy issues are in the directions down and to the right.
Our principal interest is in WFC at location , high and to the right of location . Down below WFC at less risk exposure but a similar reward payoff is AXP at location . A "market index" norm of reward~risk tradeoffs is offered by SPY at . Most appealing by this Figure 1 view might be GS at . The negatives of GS are clarified in Figure 2.
The Figure 1 map provides a good visual comparison of the two most important aspects of every equity investment in the short term. There are other aspects of comparison which this map sometimes does not communicate well, particularly when general market perspectives like those of SPY are involved. Where questions of “how likely’ are present other comparative tables, like Figure 2, may be useful.
Yellow highlighting of the table’s cells emphasizes factors important to securities valuations and the AXP security of most promising of near capital gain as ranked in column [R]. The pink highlighting identifies the less-favored WFC.
(used with permission)
Figure 2’s purpose is to attempt universally comparable answers, stock by stock, of a) How BIG the prospective price gain payoff may be, b) how LIKELY the payoff will be a profitable experience, c) how SOON it may happen, and d) what price drawdown RISK may be encountered during its holding period.
Readers familiar with our analysis methods after quick examination of Figure 2 may wish to skip to the next section viewing price range forecast trends for WFC and AXP.
Column headers for Figure 2 define investment-choice preference elements for each row stock whose symbol appears at the left in column [A]. The elements are derived or calculated separately for each stock, based on the specifics of its situation and current-day MM price-range forecasts. Data in red numerals are negative, usually undesirable to “long” holding positions. Table cells with yellow fills are of data for the stocks of principal interest and of all issues at the ranking column, [R]. Cells with pink fills, like row WFC highlight contrasts with the AXP row.
The price-range forecast limits of columns [B] and [C] get defined by MM hedging actions to protect firm capital required to be put at risk of price changes from volume trade orders placed by big-$ "institutional" clients.
[E] measures potential upside risks for MM short positions created to fill such orders, and reward potentials for the buy-side positions so created. Prior forecasts like the present provide a history of relevant price draw-down risks for buyers. The most severe ones actually encountered are in [F], during holding periods in effort to reach [E] gains. Those are where buyers are emotionally most likely to accept losses.
The Range Index [G] tells where today’s price lies relative to the MM community’s forecast of upper and lower limits of coming prices. Its numeric is the percentage proportion of the full low to high forecast seen below the current market price.
[H] tells what proportion of the [L] sample of prior like-balance forecasts have earned gains by either having price reach its [B] target or be above its [D] entry cost at the end of a 3-month max-patience holding period limit. [ I ] gives the net gains-losses of those [L] experiences.
What makes AXP most attractive in the group at this point in time is its ability to produce earnings most consistently at its present operating balance between share price risk and reward, the Range Index [G]. Credibility of the [E] upside prospect as evidenced in the [I] payoff is shown in [N]. For AXP it is .70
Further Reward~Risk tradeoffs involve using the [H] odds for gains with the 100 - H loss odds as weights for N-conditioned [E] and for [F], for a combined-return score [Q]. The typical position holding period [J] on [Q] provides a figure of merit [fom] ranking measure [R] useful in portfolio position preferencing. Figure 2 is row-ranked on [R] among alternative candidate securities, with AXP in top rank.
Along with the candidate-specific stocks these selection considerations are provided for the averages of some 2900 stocks for which MM price-range forecasts are available today, and 20 of the best-ranked (by fom) of those forecasts, as well as the forecast for S&P500 Index ETF (SPY) as an equity-market proxy. The weakness of SPY as a market-index proxy holding position becomes apparent when compared with the best 20 stock alternative fom averages 1.7 times that of the index.
As shown in column [T] of figure 2, those levels vary significantly between stocks. What matters is the net gain between investment gains and losses actually achieved following the forecasts, shown in column [I]. The Win Odds of [H] tells what proportion of the Sample RIs of each stock were profitable. Odds below 80% often have proven to lack reliability.
(used with permission)
(used with permission)
Many investors confuse any picture of time-repeating stock prices with typical "technical analysis charts" of past stock price history. Instead, Figures 3 and 4's vertical lines are a daily-updated visual record of price range forecast limits expected in the coming few weeks and months. The heavy dot in each vertical is the stock's closing price on the day the forecast was made.
That market price point makes an explicit definition of the price reward and risk exposure expectations which were held by market participants at the time, with a visual display of their vertical balance between risk and reward.
The measure of that balance is the Range Index (RI). Here in AXP, only 21% of the full forecast range of $138 to $169 lies between the current price of $138 and $145. With today’s RI there is three to four times as much upside price change in prospect as downside. Of the prior 113 forecasts like today’s RI, 100 have been profitable. The expected potential of +17% upsides became accomplishments of +12% gains in 49 market days, or about two months. So history’s advantage could be repeated over five six times a year, which compounds into a CAGR of +78% which compares to only a 7% gain from WFC.
Also please note the smaller pictures in Figures 3 and 4. They show the past 5 year distribution of Range Indexes with the current level visually marked. For AXP the larger proportion of history has been evaluations with higher prices and Range Indexes.
Based on direct comparisons with WFC and other Major Banking stocks, there are several clear reasons to prefer a capital-gain seeking buy in American Express Company.
An active investment response would be to swap capital out of WFC into AXP, anywhere the principal is sheltered from taxation by its portfolio circumstances.
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 AXP 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.
Additional disclosure: Additional disclosure: 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, both on our website and on our Seeking Alpha Contributor website.