Current MM expectations far more promising than other SA stock favorites
Netflix, Inc. (NFLX) appears rather suddenly as a near-term special opportunity. No fundamental analysis is behind this observation, but the market experiences of several prior similar instances of knowledgeable actions by experienced market professionals.
Here in Figure 1 are parallel Market-maker hedging-implied price range forecasts for some two dozen stocks and ETFs of top investment interest to Seeking Alpha readers.
Figure 1
The first 4 numeric data columns (B)-(E) are products of the analysis of current behavior of market professionals. Those columns and the one headed Range Index (G) 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 stocks 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 todays is indicated at (L), along with the total number of all forecasts available from the past 5 years of market days (M).
Think about the credibility of the current forecasts in (E). 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 (H).
The Win Odds has an important impact on the Realized Payoff column (I) next to it, where the average 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 (B) 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 true Risk~Reward Tradeoff in each investment is between the upside forecast prospect of (E) to be pitted against actual prior worst-case downside price exposures experienced during TERMD holding periods. The flavor of the prospective reward carrot (E) gets muted by the worst-tasting next-column experience headed Maximum Drawdown (F).
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. This is real risk, the actual loss of capital, not what is conventionally offered as risk in much investment education theory the potential worry over UNCERTAINTY of REWARD, the volatility of BOTH higher and lower statistical deviation from some PAST AVERAGE of price-change experiences.
Instead, committing to the disciplines full 3-month time investment (but not beyond) might achieve potential recovery to profitability (if/when at an interim price below entry cost), 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 (N) where the Realized Payoff accomplishment ((NYSE:I) is contrasted with the %Upside Sell Target offering (E).
The more critical Reward~Risk comparison draws on the Win Odds (H) (and its complement 1 minus H as a %) to condition the Realized Payoff (I) and the Maximum Drawdown (F) as indicated in the Odds-Weighted columns (O) and (P).
Figure 1s rows provide all these important dimensions issue by issue for the securities in question. They are accompanied by similar boldfaced measures of SPY to give a taste of the market as most frequently observed by the investing public.
Also are included comparisons of the subject stocks 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 populations 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.
Keeping Score
The wealth-building score is measured in Figure 1 by the portfolios compound annual growth rate (K), or CAGR. Each holding in a 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 portfolios goals. Recognizing that time presents a powerful (pun intended) function in the CAGR equations calculation, an understanding of each investment candidates 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 period times 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 1 does that in their bp/day sequence, the last column on the right (R).
The ranking tends to favor stocks with recent favorable experience and degrade those with extended unfavorable market history. The potential for significant change in trend may encourage some investors to overstay positions or to make 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.
The keys to NFLX appeal are in its prior experiences with Range Indexes of 56, where the current market quote is slightly above the mid-point of the forecast range, and the rising MM forecast ranges of the past several days seen in Figure 2 .
Figure 2
The small picture of the distribution of NFLX Range Indexes here at the bottom of Figure 2 makes it clear that the present forecast situation is not ordinary. When this kind of evaluation has been encountered in the past for NFLX it has always resulted in prices reaching the higher expectations.
The red-flagging of the sample size is due to our care to avoid ones which may be statistically misleading. In this case it should be clear that the present situation is one which, while extreme, has normally appeared in the past.
TERMD discipline in all these prior experiences has produced payoff opportunities near +14%, larger than the presently-expected +10.9% upside Sell Target.
Comparisons with equity investment alternatives
Figure 1, in its column R, shows NFLX as having an odds-weighted prospect of a gain of 115 basis points per day, with its closest two competitors of Facebook (NASDAQ:FB) and SPDR S&P500 Index ETF (NYSEARCA:SPY) at a potential of 10 bp/day. For reference, a 20 bp/day gain, maintained for a year doubles the capital involved, and 10 bp/day cumulates to a +44% gain.
The summary data at the bottom of Figure 1 indicates that there are net negative market expectations from MM forecasts over a wide set of securities, many of which are not regularly involved in block trades. But of the 20 best-ranked of that population, the outlook is for gains in the next 3 months at a rate of about 24 bp/day.
Conclusion
Expectations for NFLX make it a particularly attractive near-term gain buy opportunity. It should be treated as a singular short-term opportunity to be captured rather than as an entry to a long-term position.
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.
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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in NFLX 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.
