Preface: This article compares coming stock price expectations of well-informed market professionals. No technological or industry competitive insights will be discussed, only insights on securities’ market price influences.
Buyer-seller negotiations over large-volume blocks of thousands of stocks each US market day produce market-maker forecasts of their likely coming price ranges, including these stocks.
We rank them all based on past price performance subsequent to prior forecasts, with balances between upside-to-downside price change proportions like those seen this day.
Rankings consider odds for profitable buys, accomplishment credibility of reaching target prices, typical size of captured gains and interim price drawdowns encountered, and holding periods required. These all contribute.
HEICO Corporation scores better than a dozen-plus of its industry competitors, with prior gain experiences at a rate exceeding that of market-index tracker SPY.
Aerospace and Defense stocks in a Boeing-Induced Turmoil
The price-forecaster’s foe is uncertainty. The too-big-to-die industry leader is seriously wounded long term. How quickly it can return to operations approaching only less than “normal” and which investors will ultimately own? The surviving or shifting profitability 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 decisions be a few months at a time, with actions taken incrementally as the picture changes. Expect surprises. Market professionals are alert to the evolving developments, supported by thousands of 24x7 worldwide 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.
Best Stock Selection Requires Clear Comparisons
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.
- What alternative choices are available?
- Which have the best trade-offs between forecast-able reward and risk?
- How big a reward is realistic to expect? Why?
- How often may disappointment occur?
- How much time and capital may disappointment involve?
- How frequently may the rewards expected be compounded?
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.
If your thoughts about comparative values lead to P/E ratios, do you really believe in “generally acceptable accounting practices”? (Acceptable, more often than accepted.)
Do you really believe that multi-year, competitive share-of-market forecasts can be made in today’s rapidly advancing technology environment without error provisions – provisions carried forward into the G of P/EG value assertions?
Instead, look to demonstrated human-nature behavior of self-protection. “When the oxygen masks come down, be sure to put yours in place before attempting to help others.”
That is the perpetual work environment of investing Market-Makers [MMs] whose role is to aid buyers and sellers find a point of price balance right now in multi-million-dollar block trades. A balance which usually requires them to put a part of their own firm’s capital temporarily at the risk of changing market attitudes and prices.
They won’t do it without the oxygen of price-change protection. That insurance comes from separate hedging deals in derivative securities where the operating leverage of the limited-life legal contracts involved makes deals practical.
What must be paid for the protection, and the way it is provided tells just how far those (sufficiently) in the know realistically expect prices may go. They all have real-money bets being made. Price range forecasts over time periods defined by the derivatives contract lives are involved.
Such forecasts are constantly being refined every moment investment markets are operating, and are made part of every market-day’s closing records. They provide a historical record (in subsequent market price actions) of how well the “smart money” can make useful forecasts – for specific stocks, ETFs, and indexes.
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 worldwide 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 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. An example here is how Yahoo Finance reports on HEICO (NYSE:HEI):
HEICO Corporation, through its subsidiaries, designs, manufactures, and sells aerospace, defense, and electronic related products and services in the United States and internationally. The company's Flight Support Group segment provides jet engine and aircraft component replacement parts; thermal insulation blankets and parts; renewable/reusable insulation systems; and specialty components. This segment also distributes hydraulic, pneumatic, structural, interconnect, mechanical, and electro-mechanical components for the commercial, regional, and general aviation markets; and offers repair and overhaul services for jet engine and aircraft component parts, avionics, instruments, composites, and flight surfaces of commercial aircraft, as well as for avionics and navigation systems, subcomponents, and other instruments utilized on military aircraft. Its Electronic Technologies Group segment provides electro-optical infrared simulation and test equipment; electro-optical laser products; electro-optical, microwave, and other power equipment; electromagnetic and radio interference shielding; high-speed interface products; high voltage interconnection devices; high voltage advanced power electronics; power conversion products; and underwater locator beacons and emergency locator transmission beacons. This segment also offers traveling wave tube amplifiers and microwave power modules; three-dimensional microelectronic and stacked memory products; harsh environment connectivity products and custom molded cable assemblies; radio frequency and microwave amplifiers, transmitters, and receivers; communications and electronic intercept receivers and tuners; self-sealing auxiliary fuel systems; active antenna systems; and nuclear radiation detectors. The company serves the U.S. and foreign military agencies; prime defense contractors; and commercial and defense satellite and spacecraft manufacturers. HEICO Corporation was founded in 1949 and is headquartered in Hollywood, Florida.
Source: Yahoo Finance
Source: Yahoo Finance
We Selected other Aerospace and Defense stocks for comparisons
The stock price forecast data used in Figure 1 comes from the hedging actions of MMs.
They may be substantially smaller capitalization stocks, but Institutional Investment organizations’ researchers and portfolio managers are watching, as well as individual investors. Note columns [U] and [V] of Figure 3.
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 AJRD at location , but also BA at  and HEI at . The map includes SPY as a “market index average” at .
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 HEI, 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 value 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 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. The current level of a 16 RI is obviously well below average, strongly suggesting higher market prices in coming weeks and months.
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 (NASDAQ:MSFT) and Boeing (NYSE:BA). 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. That combination result appears in the [ I ] %payoff which includes loser forecasts as well as the 89% winners. The size of [ I ] relative to [E] is a measure of [E]’s credibility in [N].
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 EK, GM, GE, others) of their “passive investment” buy-and-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 HEI in first place by a wide margin among most other Aerospace and Defense Industry stocks. Its 12 bp/day score is above what the most widely of interest stocks in the group, Boeing Corporation offers, under 10. The market index ETF, SPY, only produces a 1 bp/d prospect.
Part of HEI’s appeal comes from its high Realized Payoffs from prior forecasts at the Range Index of 16. Winning 10 out of every 11 prior forecasts places its Realized Payoff average at +6.2%, better than most others. When that Win Odds ratio of 91 is applied to the realizations, and the Loss odds complement of 9 is applied to the drawdown maximum average of -6.2%, the odds-weighted net of +5.6% is well above that of SPY, at +0.5%. Their differences in CAGRs of +47% vs. +11% are significant.
HEI competes effectively in the broad population of MM forecasts for 2691 stocks, ETFs and market indexes. It falls short of the average best-20 average of that large set of securities which scores 38 bp/day.
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, 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.
HEICO Corporation is an attractive near-term capital-gain buy with a realistic +6% upside target attainable in as little time as eight to ten weeks. It may prove to be a better interim speculative holding vehicle than Boeing Corporation in the next 2-3 months.
There are a number of better-ranked prospects in our MM forecast population than any in the Aerospace and Defense group at present.
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.
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 in the SA blog of my name.