Quality stocks price forecasts from best-informed pro players
Assembling our usual daily MarketMaker [MM] hedging-derived near-term (3-6 month) price range forecasts for the DJ 30-index stocks, their Reward-to-Risk tradeoffs are pictured in Figure 1.
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Upside price rewards come from the behavioral analysis (of what to do right, not of errors) by Market-Makers [MMs] as they protect their at-risk capital from possible damaging future price moves. Their potential reward (best upside likely price change) forecasts are measured by the green horizontal scale.
The risk dimension is of actual-experience price drawdowns at their most extreme point while being held in previous pursuit of upside rewards similar to the ones currently being seen. They 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.
Best reward-to-risk tradeoffs are to be found on this map at the frontier of alternatives, down and to the right. In this case from Amphenol (NYSE:APH) at  to Rudolph Technology (RTEC) at  to Belden Corporation (BDC) at .
Additional dimensions of concern to investors appear as we look more deeply into how well the MMs’ forecasts have been met by subsequent market price actions. These are presented in Figure 2.
The Figure 2 table has two distinctive parts. The first 4 numeric data columns are products of the analysis of current behavior of market professionals. Those columns and the one headed Range Index report what that behavior implies about the current expectations of investment professionals for the likely range of stock or ETF prices in the coming 3-4 months.
The remaining columns report what actual market price activity produced when prior forecasts for each stock similar to those of today were used to manage investments under a common portfolio discipline. The Range Index column tells what percentage of each stock’s current forecast lies below the current market price. Under the Sample Size column heading a count of the number of prior forecasts with Range Indexes like today’s is indicated, along with the total number of all forecasts available from the past 5 years of market days.
Thinking about the credibility of the current forecasts, the proportion of those similar prior forecasts that could produce a capital gain profit becomes a significant measure. It demonstrates the capability of the forecasters to be helpful to the wealth-building investor. Its proportion as a percent of the prior forecasts sample is in the column headed Win Odds.
The Win Odds has an important impact on the Realized Payoff column next to it, where the NET gains of all the prior forecasts in the sample are reported. These results include the actual losses taken under our standard portfolio management discipline TERMD, applied to all forecast situations. TERMD sets the top of each implied price range forecast as a sell target for that single forecast. When first reached within the next 3 months’ closing market price that forecast position is closed so that the expanded capital can be immediately reinvested the following market day. If not reached in 3 months the position is closed and reinvested, regardless of gain or loss.
The Risk~Reward Tradeoff map of Figure 1 presents upside forecast prospects to be pitted against actual prior worst-case downside price exposures during TERMD holding periods. The flavor of the prospective reward carrot, the column headed in the Figure 2 table as %Upside Sell Target, was muted there by the worst-tasting next-column experience headed Maximum Drawdown.
That point is viewed as the most likely high-stress point to cause an untimely termination of the adventure. A termination then would be at the least productive, most damaging point. Instead, committing the discipline’s full 3-month time investment (but not beyond) might achieve potential recovery to profitability, perhaps even to reach the forecast sell target
Between the target “cup” and the %Payoff “lip” serious adjustments to commitment enthusiasms can (and usually may) occur. They are indicated by the column headed Cred.Ratio where the Realized Payoff accomplishment is contrasted with the %Upside Sell Target offering.
The more critical Reward~Risk comparison draws on the Win Odds (and its complement) to condition the Realized Payoff and the Maximum Drawdown as indicated in the Odds-Weighted columns.
Figure 2’s rows provide all these important dimensions issue by issue for the more promising securities in Figure 1. They are accompanied by similar boldfaced measures of SPY to give a taste of “the market” as most frequently observed by the investing public.
At the bottom of the table simple averages of the listed stocks offer comparisons of the group with SPY and with a much broader population of over 2,700 stocks and ETFs as measured on this day. The population data often reveals overly optimistic sell targets and abysmal payoff results. In contrast, the population’s “top20” issues, ranked by their odds-weighted prior forecast histories, typically present annual rates of capital accumulation in the +75% to +90% range and even above.
The wealth-building score is measured by the portfolio’s compound annual growth rate, or CAGR. Each holding in the portfolio contributes its part, given the emphasis of capital commitment dedicated to it. Here each available candidate is viewed as having an equal participation prospect on an all or none basis at this point in time and opportunity.
But CAGR is the meaningful standard. It makes the “speed” of wealth accumulation critical because the efficient use of time provides a non-financial leverage in attaining the portfolio’s goals. Recognizing that time presents a powerful (pun intended) function in the CAGR equation’s calculation, an understanding of each investment candidate’s time investment is important. In the financial community the “speed” of reward is measured in units of “basis points per day”. A basis point is 1/100th of one percent.
Under the portfolio management discipline of TERMD the holding periods of capital commitment to various positions may be quite uneven. This is in contrast to the usual methods of measurement for portfolio performance, looking at all holdings during equal calendar periods. That style of measurement tends to encourage buy&hold investing strategies which result in grossly inefficient capital utilization when the significant leverage of time is considered.
This kind of passive investment management behavior is a hang-over of 20th century investing economics when making holdings changes was quite expensive. At that time serious opportunity for positive reward increments was required to justify the cost of making holdings changes. Payback periods measured in multiple months to years could often be encountered.
Advances in transaction technologies now present paybacks of days to hours, with trends spurred by incentives among competing service providers.
When measuring the attractiveness of investment candidates in a wealth-building mission environment it makes sense to rank them by their demonstrated rates of capital accumulation. Figure 2 does that in their bp/day order, the last column on the right.
The ranking tends to favor stocks with recent favorable experience and degrade those with extended unfavorable market history. The potential for demonstration of significant change in trend may encourage some overstaying positions or new investment choices with an investment losing its market-competitive edge. But it also impedes a too-eager repetition of falling-knife experiences where ultimate recovery may be reasonably expected.
ST, CGNX ,ETN, AME, AVT, A, BHE, SPWR, AXE, ALOG, LPL, and AXDX are all in the latter category – about half of the stocks in the group . But perhaps their recovery potentials, when more clearly arrived, may still provide attractive (and fulfilled) rankings.
When this level of analysis is focused on the odds for profitable experience and size of likely payoffs we have the comparisons of Figure 3.
Odds and Payoffs Comparisons
The orientation of this map is like that of the Reward~Risk Tradeoffs in Figure 1; good is down and to the right, not-so is up and to the left. Items in the white Payoffs area at left have achieved average Win Odds amounts less than 80 out of 100, and those in the extreme upper left corner also have had negative % payoffs from prior forecasts at current RI-levels.
For market-reference we include S&P500 Index ETF (SPY) at  to provide a sense of aggregate opportunity and achievement. It turns out that the best current combination of Odds and Payoffs is in RTEC at , with BDC at  a close contender, depending upon the investor’s preferences between scale of payoff and assurance of outcome. All of the pictured electronics equipment stocks are more appealing than SPY at these prices and time.
Recent daily MM forecasts are shown for RTEC in Figure 4 and for BDC in Figure 5.
Note: This is not a conventional price history “chart”. It is a record of MM live-date forecasts of the stock’s near-term (3-4 coming months) range of likely prices. Forecasts made on the dates indicated, not after the fact. The vertical price-range forecast lines of Figure 1 are split into upside and downside prospects by the heavy-dot end-of-day market quote for the issue on the day of the forecast.
A measure of the imbalance between up and down possible price change implications is the Range Index [RI], which tells what percentage proportion of the entire forecast range lies below the current price. The thumbnail picture at the bottom of Figure 4 presents the distribution of RIs for the stock seen in the past 5 years.
The small sample size for BDC is a product of its current price being significantly below its forecast range. Prior experiences with similar forecasts have been 5 out of 6 (83%) producing nearly +15% gains, including the one loss.
A broader market look
The upside-to-downside prospects of our population of 2700+ MM price-range forecasts is compared in Figure 6, where the day’s distribution of Range Indexes are displayed.
Range Indexes tell what percentage of the entire forecast range lies below the current market quote for the security at the time of the forecast. It is like a “normalized” price tag. Cheap securities are at the left, expensive ones are on the right.
A look at how many are to the right of 50, where upside and downside prospects are equal, gives a pretty good indication of how widespread a price decline threat exists.
The fact that approaching 25 securities are stacked up at the left end of the scale, and at least as many more have RIs below zero (price now below forecast low) are further indicators that overall market pressures are more likely to the upside than down.
The summary lines of Figure 2 confirm that there are at least 20 stocks with highly attractive near-term capital gain expectations, most with better than 8 out of 10 odds of being profitable.
Just because some media person has never seen a market index number before as high as it is now (or recently has been) doesn’t mean “the end is near”. Careful selection may well be a good practice, since experienced, well-informed market professionals are identifying several “quality” stocks where waiting for the development of a better outlook is advised. RTEC and BDC appear to be opportunity leaders at the moment, and even more attractive ones are present.
Please remember this is a near-term evaluation, suggesting CAGR price gain opportunities far above multi-year trendline price growth street estimates for the group. What may appear as more attractive in a few months, providing future price-compounding capital growth opportunities may be very different from the then less attractively-priced current investment competitors. An updating follow-up visit to the group is advisable.
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.
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: RTEC and BDC are our primary ticker symbols for this article