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.
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.
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.)