Category Archives: Edson Gould

Netflix: Downside Targets

Review

On December 3, 2010, we ran the numbers for Netflix,based on the work of Edson Gould’s Speed Resistance Lines, to determine what the downside risk might be for the stock.  The projected downside targets are illustrated below:

Not long afterwards, Netflix stock price soared from $185.45 to $300.  However, the goal of our site is to determine downside risk and the rise in the stock price of was of little interest.  Our view is that if we missed an investment opportunity then we will consider investing only if the stock declines to any of the anticipated downside targets.

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Naturally, there was considerable opportunity that we missed on the way from $185 to $300.  However, our rule is to seek values and from our experience all quality companies become undervalued at some point. Finally and for numerous reasons, Netflix declined from the peak of $300 to as low as $53.80.  Naturally, we were able to pick up shares of Netflix at $62, a price we felt was reasonable at the time.  Our critical review of the downside targets allows us to accept our purchases for the long-term in case we happen to be wrong about the short-term upside prospects.

October 15, 2014: Netflix Downside Targets

Quick Take: GoPro Downside Targets

We’re fascinated with the news surrounding GoPro (GPRO).  The stock went public on June 26, 2014 at $24 per share and has since increase in price to $89.93 as of October 8, 2014.  As public offerings go, the rise in price is considered a success.  As recently as October 7, 2014, Barclays raised their price target for GPRO from $45 to $60, in spite of the fact that the stock is already trading well above the new target price.  It seems that Barclays doesn’t want to appear over anxious to recommend the stock even though they are not confirming their expectation for the stock to decline.

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Quick Take: Consolidated Edison

“The valuation problem is far from academic: In recent years, some huge-scale frauds and near-frauds have been facilitated by derivatives trades. In the energy and electric utility sectors, for example, companies used derivatives and trading activities to report great ‘earnings’ – until the roof fell in when they actually tried to convert the derivatives-related receivables on their balance sheets into cash. ‘Mark-to-market’ then turned out to be truly ‘mark-to-myth.’”

Buffett, Warren. Berkshire Hathaway. 2002 Letter to Shareholders. February 21, 2003.

Berkshire Hathaway: 10-year Price Projections

In our May 6, 2012 posting on Berkshire Hathaway (BRK-A) titled “Should Berkshire Hathaway Be Trading at 1995 Prices?”, we gave price projections based on Edson Gould’s Altimeter using very conservative estimates if BRK-A paid a dividend.  As we’ve managed to achieve the middle of the three upside targets set down in our 2012 article, we’re going to list the price that we think BRK-A would be considered undervalued for each of the next 10 years.

Apple meets NLO Upside Target

On August 19, 2014, Apple (AAPL) stock price rose as high as $100.66.  When Apple was trading at $61.61 on March 9, 2013, we said the following with the accompanying chart:

“Apple Inc. (AAPL) is at the top of our watch list as it is within 5% of the one year low.  In our April 14, 2012 test of the quality of Edson Gould’s Speed Resistance lines, Apple fell from $636 [adjusted price of $90.85] to our projected level of $424.15 [adjusted price of $60.59] (found here).  Now that the stock has achieved our downside target, we expected that a reaction to the upside is likely.”

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On July 17, 2013, when Apple was trading at $61.47, we re-affirmed our view of the upside potential for Apple with the following commentary:

“Currently, Apple is demonstrating a basing pattern that if successful, could result in a breakout to the upside.  At the current levels, we wouldn’t be opposed to buying some shares of Apple with the expectation that the stock could decline an additional –25% to –35%.”

The work of Edson Gould has proven to be astounding when considered in its context.  On April 14, 2012, we posted an article titled “Considering the Downside Prospects for Apple”.  At that time, we were revising the previous estimates of downside risk done on February 5, 2012 (third party source available here).

What was mentioned on February 5, 2012 is critical to understanding how Edson Gould’s downside projections work.  At the time, we said:

“The very first thing that we look for, to determine speed resistance lines, is the most recent peak in the price. Because AAPL is continually making new highs, we only need to use the latest price of $455.68 [post split price of $65.09] as our starting point….As the price of Apple increases, so too does the SRL lines based on the work of Edson Gould.”

This means that as long as the price of the stock increases to a new high the speed resistance lines are expected to increase as well.  Only when the stock starts on a declining trend can we expect that the stock price might go to the conservative and extreme downside targets.

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On April 14, 2012, when Apple was trading at $90.89 (pre-split price of $636.23), we said the following:

“…we believe that, based on the current speed resistance lines, no one would expect Apple to decline to our conservative downside target of $424 (post split price of $60.57)…”

The strength of Gould’s downside risk estimates is that we didn’t even have the peak price of $100.71 set on September 18, 2012 but we were still able to see the conservative downside target of $60.57 achieved.  Had we used the peak price, we would have achieved the $67.14 conservative downside target much earlier than the $60.57 level.