Category Archives: Edson Gould

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.

A Different Perspective on Lumber Liquidator

On February 25, 2015, when Lumber Liquidator was trading at $57.23, we said the following:

“Those interested in LL and willing to perform appropriate due diligence could engage in a three phase purchase plan beginning below $39.81, $31.64 and $23.47.  Investors, as opposed to speculators, should be willing to accept that there is no compensation for the wait when holding LL and that the decline to the ascending $23.47 level is a real risk.”

In fact, Lumber Liquidator blasted below the $39.81 support level and has rested at the $31.64 support level and started to move higher as seen in the chart below.

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We’ve intentionally left out the move up from $38.83 to highlight the extent of the decline and the high level of coincidence with the supports levels that we had outlined in the previous month.  All that remains is the decline to the $23.47 level.

While famous short-sellers have the ear of influential media to talk their book and ensure their profits, we only have price action to work from.  For this reason, it is well worth noting another coincidence that relates to Lumber Liquidator and futures price on lumber as seen in the chart below.

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The coincidence of Lumber Liquidator (LL) declining significantly at the same time as the futures price of lumber (as traded on the Chicago Mercantile Exchange) seems difficult to ignore.  Investors should take note of the fact that in three prior periods indicated in blue, LL has lost a minimum of –35% and as much as –53% when the price of lumber declined –33% or more. 

So far, from December 2013 to March 2015, the price of lumber has declined –23% while LL has declined as much as –67.49%.  Much of the decline in LL has been exacerbated by concerns related to quality and sourcing of the flooring.  However,  the current decline is only slightly out of alignment from what has happened in the past. 

We say slightly because we’re excluding the peak in lumber at 395.50 when LL was trading at $62.19.  While lumber was trading lower and not to exceed the $395.50 (considered a bear market), LL gained another +92.05%.  If Lumber Liquidator’s decline was measured from the February 15, 2013 peak in lumber at $395.50, the decline in the stock price would equal –37.56%.

Assuming we aren’t on the cusp a new bear market, the decline in LL has been overdone and an individual willing to accept the downside risk to $23.47 should consider implementing a three phase purchase plan.  An investor must keep in mind that the conservative upside target is $80.53 which is the new “limit” for the stock instead of the previous $119.44.  In addition, the downside targets now act as upside resistance level as was the case when LL could not sustain the $53.68 level prior to the recent collapse.

Technical Take: LL & SAM

Below are the downside targets using Speed Resistance Lines [SRL] for Lumber Liquidator Holdings (LL) and Boston Beer Company (SAM) based on the work of Edson Gould.

Lumber Liquidator (LL) has declined from the peak of $119.44.  Gould’s SRLs suggest that from the peak price, LL has a conservative downside target of $53.68 and an extreme downside target of $39.81.

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On February 25, 2015, LL was unable to sustain a price above the ascending $53.68 level with a decline of over –17%.  Our best guess is that LL will decline to the ascending $39.81 level, which currently approximates $49.50 price.  Those interested in LL and willing to perform appropriate due diligence could engage in a three phase purchase plan beginning below $39.81, $31.64 and $23.47.  Investors, as opposed to speculators, should be willing to accept that there is no compensation for the wait when holding LL and that the decline to the ascending $23.47 level is a real risk.

Boston Beer Company (SAM) is the brewer of Samuel Adams beer and a multitude of other “craft” beers.  Today SAM declined –10% on an earnings miss.  Below is the SRL for SAM.

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Our expectations for SAM are not very high as the last time that the stock was able to achieve the conservative downside target of $70.13 was in 2011.  Since that time, SAM has faltered but not fallen.  In spite of this fact, we’ve outlined the conservative downside target of $180.12 and the extreme downside target of $107.99.  Investors should note that a decline to the ascending $180.12 level is an ideal buying target with a follow-up purchase below $141.25.  As with Lumber Liquidators, SAM is bet on growth in the stock price and not much else. 

The relative strength of each company (long-term viability) is what makes these stocks compelling and worth considering at the appropriate predetermined price.