A competitive selection from limited alternatives
Typical of many investing reports, the alternatives posed here are all industry competitors, supported by not very helpful background information. Example:
Lumentum Holdings Inc. (NASDAQ:LITE) manufactures and sells optical and photonic products in the Americas, the Asia-Pacific, Europe, the Middle East, and Africa. The company operates in two segments, Optical Communications (OpComms) and Commercial Lasers (Lasers). The OpComms segment offers components, modules, and subsystems that enable the transmission and transport of video, audio, and text data over high-capacity fiber optic cables. It offers tunable transponders, transceivers, and transmitter modules; tunable lasers, receivers, and modulators; transport products, such as reconfigurable optical add/drop multiplexers, amplifiers, and optical channel monitors, as well as components, including 980nm, multi-mode, and Raman pumps; and switches, attenuators, photodetectors, gain flattening filters, isolators, wavelength-division multiplexing filters, arrayed waveguide gratings, multiplex/de-multiplexers, and integrated passive modules. This segment also provides Super Transport Blade, which integrates optical transport functions into a single-slot blade; optical transceivers for fiber channel and Ethernet applications; vertical-cavity surface-emitting lasers; directly modulated and electro-absorption modulated lasers; and laser illumination sources for 3D sensing systems. It serves customers in telecommunications, data communications, and consumer and industrial markets. The Commercial Lasers segment offers diode-pumped solid-state, fiber, diode, direct-diode, and gas lasers for use in original equipment manufacturer applications. It serves customers in markets and applications, such as sheet metal processing, general manufacturing, biotechnology, graphics and imaging, and remote sensing, as well as in precision machining, such as drilling in printed circuit boards, wafer singulation, glass cutting, and solar cell scribing. Lumentum Holdings Inc. was incorporated in 2015 and is headquartered in Milpitas, California.
Instead, consider what institutional investors apparently regard as a full price for the stock and a time to cash out: $58.55. That’s up +20% from its current $48.77.
How do we know? From what Market-Maker firms like GS, MS, ML-BAC pay for price-change hedging protection when they go short in order to “fill” a client portfolio manager’s order, one big enough to make a difference in the client’s multi-billion-dollar portfolio.
Should we pay any attention to some momentary market enthusiasm? Or distress? What’s the likely downside?
Answer: $45.20, down about -7% from the $48.77. Again, how do we know?
From the same process we took on the “buy” side: The sellers of the “insurance” which MMs buy have their own concerns in the opposite direction, also reflected by their hedging actions.
That price range of $58 to $45 is itself a forecast with useful attributes. The current market of $48.77 splits it into two parts, a +20% upside and a -7% downside. The range has about three times as much upside as downside. Precisely, 26% of the whole range is to the downside. Our Range Index [RI] measure for LITE here is 26.
Wanna bet that coming prices for LITE would be different when its RI is 35 rather than 26? How about if the RI was over 50, when there is more downside than upside?
We make careful studies of the coming prices for stocks, given their present Range Index values. We have done that for a handful of LITE competitors in the smartphone production business, the same way we have today for 2633 stocks and ETFs (out of the 4,000+) which were not rejected due to data deficiencies.
Comparing the details
Figure 1 contains those histories for comparison purposes, with LITE at the top of the table.
Columns [B], [C], [D] contain the forecast parts producing the Range Indexes of [G]. Each stock had a number [L] of RI forecasts like today’s in the past 5 years. LITE had 83 out of 1,040. AAPL had 162, but with RIs of 35 where the upside price change prospect was only twice as large as the downside. TSM currently is forecast to have larger downsides than upsides, so its RI is above 50. LPL is a flawed-data outcast with a flagged RI of 130 and should be ignored.
The SPDR S&P 500 Index ETF (SPY) is included to give a market-average idea of norms for widely-held and actively-traded stocks. The row below SPY is a census of over 2600 stocks and ETFs (including SPY & components) to suggest by how much the behavior of less well-followed stocks may differ from well-known ones.
Finally, the bottom row of Figure 1 is an average of the histories of market price changes in the best-performing 20 stocks in the next 3 months. Best when only bought on days in the past 5 years having RI price range forecasts measured like today’s.
The smartphone-producer stocks of Figure 1 were row-ranked by the odds for and size of and PACE of net capital gains (column [R] ) as measured by basis points of gains per day of the positions holdings. Positions managed by the same portfolio discipline as the top-20 group. So the LITE sample of 83 buys earned 18.2 basis points per day in the 37 average days each position was held, compared to AAPL’s 162 buys of its forecasts having today’s RIs of 35. Those AAPL forecasts were winners only 65% [H] of the time, while LITE’s buys were profitable in 78% of their buys at RIs of 26. That difference cut AAPL’s Realized Payoffs [ I ] to an average gain of only +2.3%, compared to LITE’s +11.5% average.
By using the Win Odds and its complement to recognize the risks encountered in [F], LITE’s realizations were trimmed to +6.7%, and AAPL’s small gains were transformed into small forecast losses in column [Q]. All of column [Q] had each stock’s average time investment in [ J ] Days Held recognized to get [R] payoff rates of bp/day.
LITE’s +18.2 bp/day is a bit short of the 19 which, when sustained for a 365-day year produces a 100% CAGR (a doubling of the original capital involved). But it is far ahead of SPY’s bp/day of +3.0, with a CAGR showing in [K] of +15%. Still, the top-20 competition is a much more effective wealth-building set, with bp/day averages of +27, half again ahead of LITE, and with CAGRs realized at the +133% average rate for those 20.
No guarantees provided here, only perspectives, based on what has happened under prior comparable circumstances. Experience suggests that being an odds-player here tends to be a productive choice.
Figure 2 provides a picture of the recent six months of daily MM price range forecasts for LITE, along with a picture of the frequency distribution of the MM’s Range Index [RI] forecast up-to-down proportions daily during the past 5 years.
The row of data contained in Figure 2 is the product of following TERMD portfolio management discipline in buy positions during the 3 months subsequent to forecasts at RI levels equal to today’s. It is the same data as shown in Figure 1.
Investors interested in achieving better-than-market-average near-term capital gains from equity investment in smartphone producers appear to have the advantage now when choosing Lumentum Holdings Inc. over other discussed industry alternatives.
Disclaimer: At Peter Way Associates, 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.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in LITE 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.