Category Archives: Edson Gould

Chesapeake Energy is on Target

On April 26, 2012, we posted an article titled “A Warning For Chesapeake Energy Stockholders”.  In that article we said the following:

“While it appears that Chesapeake Energy  (CHK) has seen all the punishment that could possibly lay ahead, we’re concerned that the previous technical pattern in the period from 1993 to 1999 is about to repeat.”

The period from 1993 to 1999 saw (CHK) decline from as high as $27 to under $1.00.  The 2012 article was written when CHK was at $18.10 and had already fallen more than –66%.  So far, CHK is on track to replicate the decline achieved from 1993-1999.  The next downside target for Chesapeake Energy is $4.50.

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IBM: A Value Investor’s Delight

In April 2012, we published an article titled, “What Does Warren Buffett See In IBM?”  At the time we concluded the article with the following thought:

“…just imagine what IBM will look like after falling to a 52-week low.”

A reader of our article took exception to the idea of IBM declining in price with the remark:

“I have no idea why you think you could buy IBM on a 52 week low. There is nothing fundamental about the company that would lead one to think that might happen. IBM is a difficult company to short because people who own it primarily intend to hold it for a longer term, do not trade on margin, and do not sell their shares based on fear (Momintn. What Does Warren Buffett See in IBM? April 19, 2015. link.).”

Since our article, IBM has declined from $207 to $161 with upside movement being limited to $213.

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In spite of the price decline of nearly –22% since 2012, IBM has increased the dividend by +53%.   This has resulted in a situation where the price of IBM has becomes very compelling from a value perspective.  As indicated in our original article on IBM, the growth of the dividend has become an overpowering force which is creating a stock that could eclipse all expectation for long-term investors.  This leaves aside the topic of IBM share repurchases which Warren Buffett discussed in his 2011 shareholder letter.

Our premise of IBM’s valuation is narrowly perched on the work of Edson Gould’s Altimeter.  Below is an update of Gould’s Altimeter since our April 2012 article.

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According to Gould’s Altimeter, IBM is now undervalued below the levels of the 2008 low.  We think that a value investor would have fun pouring over the data to determine the actual value of IBM.   Gould’s Speed Resistance Lines [SRL] indicate that the conservative downside target for IBM is $130.  However, we think a process of accumulation at the current price, and below, is a prudent long-term strategy.

Hospitality Properties Trust Downside Target

We’re always hopeful and expectant about the future prospects of any investment that we make.  However, that doesn’t mean that we’re going to ignore the most pressing matter when investing which is assessing the downside risk.  Below is the downside risk assessment for Hospitality Properties Trust (HPT) based on the work of Edson Gould.

The first tool of Gould is the Altimeter.  This assesses a stock based on the stock price relative to the dividend that is paid.  In this case, HPT has come off of a recent high near 70.  This high matched the high of late 2006, the subsequent decline brought the stock price down nearly –80%.  We don’t think that it is realistic to believe that HPT will decline as in the period from 2006 to 2008.  However, we’ve outlined in red a low that we feel is reasonable if a decline were to take place.  This low is at the $21 level where there appears to be a common retracement point.

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If worse comes to worse, HPT could decline to point A or $13.00.  If a repeat of the housing crisis were to take place then HPT could decline as low as point B or $4.67.

The other tool that Gould used was the Speed Resistance Line [SRL].  The SRL is ideal for stocks that increase significantly out of proportion to the general stock market.  As HPT has increased nearly twice that of the S&P 500, we feel that the SRL is the most appropriate assessment for downside risk.

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In this case, the SRL indicates that the conservative downside target is $26.22.  In the previous decline of 2006 to 2008, HPT declined to the previous low set in 1999 at slightly below $5.00.  However, as we mentioned before, we don’t think that this time is anything like the rise and fall of the housing bubble.  Therefore, we’re looking for HPT to successfully breach the $26.22 level and retrace to the $18.86 level before a possible rebound.  Our experience has been for HPT to adhere to the ascending lines for most stocks that we have covered in the past.

Who is Edson Gould?

"Edson Gould spent over 60 years working in and studying financial markets. Gould studied the arts at Princeton, engineering at Lehigh (from where he graduated in 1922), and finance at New York University. In 1922, after working for a short time at Western Electric, he joined Moody's Investor Service as an analyst and later was editor of Moody's Stock Survey, Bond Survey, and Advisory Reports. In 1948, he began at Arthur Wiesenberger & Company, where he developed and edited the well-known Wiesenberger Investment Report and became a senior partner. He also was Research Director at E. B. Smith (which later became Smith Barney), and worked for Nuveen."

(source: Market Technicians Association. Gould, Edson Beers, Knowledge Base. Accessed April 26, 2012. link MTA reference.)

"Market technician Edson Gould always laughed at the idea of having a significant influence on the stock market, but his predictions were the most precise around. He pinpointed major bull markets and prophesied bottom-out markets as if he had his own peephole into the future. But in place of a crystal ball and wacky off-the-cuff schemes, his were smart, intensely researched and time-tested theories that made him a legend in the investment community."

(source: Fisher, Kenneth L.. 100 Minds That Made the Market. Business Classics, Woodside, CA. 1993. page 320.)

GMCR: Downside Targets

On October 25, 2011 when Green Mountain Coffee Roasters (GMCR) was trading at $63.85, we projected conservative and extreme downside targets of $59.93 and $37.21, respectively.  Subsequent price action for the stock brought the price as low as $17.11.  After achieving the downside target the stock rose as high as $158.87 by November 2014.  The potential gains of acquiring GMCR below either downside target was +165% and +326%.

The problem with this modeling of the past is having the fortitude of buying the stock and watching it fall –66% before the subsequent rise.  Can you handle a decline of –50% or more in your investments?  If you can’t sleep at night with losses of –50% or more then don’t bother reading any further as what follows is speculation of what would happen if history were to repeat (NOTE: history does not repeat).

Alternate reading on portfolio losses of –50% or more by Charlie Munger.

LinkedIn Corp. Downside Targets

On April 30, 2015, in after-hours trading, LinkedIn (LNKD) declined –20.95% from the closing price of $252.13 to $199.30.  with such a decline, it is worth considering what the downside risk would be according to Edson Gould’s Speed Resistance Lines (SRL).

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The above chart shows the current SRL downside targets based on the peak price of $276.16:

  • $187.68 (conservative target)
  • $139.87 (midpoint target)
  • $92.06 (extreme target)

What is most relevant in this SRL is the downside targets from the previous peak at $256.14.  At that time, LNKD had the following downside targets:

  • $181.00 (conservative target)
  • $133.19 (midpoint target)
  • $85.38 (extreme target)

In the prior decline, LNKD fell to slightly below the midpoint target at $133.19.  This suggests that the current slump should go below the conservative downside target of $187.68.  Going below the $187.68 level should get the stock price to the ascending midpoint target of $139.87.  Those interested in LNKD should consider the stock in stages at or below the ascending $139 level with an acceptance of a decline to the ascending $92.06 level.

Worth noting is that anyone who had a standing stop loss order with their broker, say below $250 or $240, will be forced out of their position once the stock market opens on May 1, 2015 at whatever the opening price is as long as it is below either of the sample levels.  At $199, investors with stop loss orders will take a severe beating even though they may not have been involved in the after hour activity.