Palo Alto Networks (PANW): Pure Behavioral Analysis

Stock Market


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Investment Thesis

To get professional investor prospective price forecasts we look to the hedging actions of Market-Makers. They protect their at-risk capital endangerment. Capital required by the automation achieved by markets in serving a continuing flow of individual investor small trades instead of irregular huge-value “institutional” transactions.

The pricing and structure of such hedges reveal the coming-price expectations of both the MM protection-buyers and that of the MM industry protection sellers.

Our selection of Palo Alto Networks (PANW) is prompted by their currently-attractive stock pricing coupled by a large following of Seeking Alpha readers.

Risk ~ Reward Comparisons of Portfolio Investment Candidates

Figure 1

Risk & Reward forecasts implied by hedging

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(used with prior permission)

The tradeoffs here are between near-term upside price gains (green horizontal scale) seen worth protecting against by Market-makers with short positions in each of the stocks, and the prior actual price drawdowns experienced during holdings of those stocks (red vertical scale) . Both scales are of percent change from zero to 25%.

The intersection of those coordinates by the numbered positions is identified by the stock symbols in the blue field to the right.

The dotted diagonal line marks the points of equal upside price change forecasts derived from Market-Maker [MM] hedging actions and the actual worst-case price drawdowns from positions that could have been taken following prior MM forecasts like today.

Our principal interest is in PANW at location [5]. A “market index” norm of reward ~ risk tradeoffs is offered by SPDR S & P500 index ETF at [2].

Those forecasts are implied by the self-protective behaviors of MMs who must usually put firm capital at temporary risk to balance buyer and seller interests in helping big-money portfolio managers make volume adjustments to multi-billion-dollar portfolios. The protective actions taken with real-money bets daily define the extent of likely expected price changes for thousands of stocks and ETFs.

This map is a good starting point, but it can only cover some of the investment characteristics that often should influence an investor’s choice of where to put his / her capital to work. The table in Figure 2 covers the above considerations and several others.

Comparing Alternative Investments

Figure 2

detailed data for choice of alternatives

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(used with permission)

Column headers for Figure 2 define 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 numerics are negative, usually undesirable to “long” holding positions. Table cells with pink background “fills” signify conditions typically unacceptable to “buy” recommendations. Yellow fills are of data for the stock of principal interest and of all issues at the ranking column, [R].

Readers familiar with our analysis methods may wish to skip to the next section viewing price range forecast trends for PANW.

Figure 2’s purpose is to attempt universally comparable answers, stock by stock, of a) How BIG the 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.

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 most likely to accept losses.

[H] tells what proportion of the [L] sample of prior like 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 and [N] suggests how credible [E] may be compared to [ I ].

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 candidate securities, with PANW yellow-row identified.

Along with the candidate-specific stocks these selection considerations are provided for the averages of over 3000 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 (NYSEARCA: SPY) as an equity market proxy.

Trends in MM Price-Range Forecasts for PANW

Figure 3

price range forecasts implied by hedging

blockdesk.com

(used with permission)

This picture is not a “technical chart” of past prices for PANW. Instead, it is the past 6 months of daily price range forecasts of market actions yet to come in the next few months. The only past information there is the closing stock price on the day of each forecast.

That data splits the price range’s opposite forecasts into upside and downside prospects. Their trends over time provide additional insights into coming potentials, and helps keep perspective on what may be coming.

The small picture at the bottom of Figure 3 is a frequency distributionof the Range Index’s appearance daily during the past 5 years of daily forecasts. The Range Index [RI] tells how much the downside of the forecast range occupies of that percentage of the entire range each day, and its frequency suggests what may seem “normal” for that stock, in the expectations of its evaluators’ eyes.

Here the present level is near its least frequent, lowest-cost presence, encouraging the acceptance that we are looking at a realistic evaluation for PANW. With nearly all past RIs above than below the present RI there is more room for an even more positive outlook.

Investment Candidates’ Prior Profitability Prospects

Figure 4

comparable outcomes of prior forecasts

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(used with permission)

This comparison map uses an orientation similar to that of Figure 1, where the more desirable locations are down and to the right. Instead of just price direction, the questions are more qualitative: “how big” and “how likely” are price change expectations now?

Our primary interest is in PANW’s qualitative performance, particularly relative to alternative investment candidate choices. Here PANW is at location [4]the intersection of horizontal and vertical scales of + 20% gain and + 96% assurance (odds of a “win”).

As a market norm, SPY is at location [1] with a + 15% payoff and a 100% assurance of profitability. PANW tends to dominate all the return payoffs in this comparison.

Conclusion

Among these alternative investments explicitly compared Palo Alto Networks (PANW) appears to be a logical buy preference now for investors seeking near-term capital gain.

Question: Is this form of comparisons more or less useful to you in your investment choice selections than one geared to industry economics or competitive actions?

Additional disclosure: Peter Way and generations of the Way Family are long-term providers of perspective information, previously 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 DIY 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 at our SA blog under my name.



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