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Forget about quarterly earnings reports. This prospect is mainly about stock prices: What America’s Car-Mart (CRMT) prices are now, what they have been, and what they are likely to be.
First, know where CRMT ranks in the quality of demand scale for automobile purchases:
“America’s Car-Mart, Inc., through its subsidiaries, operates as an automotive retailer in the United States. The company primarily sells older model used vehicles and provides financing for its customers. As of April 30, 2020, it operated 148 dealerships in the South-Central United States. America’s Car-Mart, Inc. was founded in 1981 and is based in Rogers, Arkansas.”
Source: Yahoo Finance
We have over a decade of daily price range forecasts implied by the way Market-Makers [MMs] have hedged firm capital needed to get stock seller and stock buyer volumes in sync in order to “fill” volume block trade orders. This is a small-cap ($577 million) stock with some hefty occasional players entering and exiting the game. The current cast includes:
Source: Yahoo Finance
And in order to have some market operating perspective, here is a sense of the present picture:
Source: Yahoo Finance
A day’s average volume, in its entirety, is under $5 million. What is likely to happen when the players in Figure 1 develop a change of interest – either way?
Figure 3 shows (Hooray!) an environment of price progressions quite unlike those of SPDR S&P 500 Trust (NYSEARCA:SPY). On its right are daily price range (vertical bars) forecasts for CRMT over the past 6 months. On the left are once-a-week extracts of daily CRMT forecasts over the past two years.
(Note: all materials from blockdesk.com have been approved for this article)
All that can be seen of this year’s March price drop in the daily forecast picture is the bottom and its recovery up to this week’s pull-back. The left-hand, weekly picture of forecasts puts on a better perspective of what may lie ahead. Its most recent (yesterday’s) weekly trace is the most recent day’s forecast in the right-hand daily picture.
Refer back to Figure 2’s report of a “beta” price-change relationship with SPY of 1.34.
Figure 4 presents the Market-Making community’s present coming-3-month outlook for the buyable version of the S&P 500 Index, a trust holding in ETF form, SPY.
They see a likelihood of SPY moving from $335 presently (or even worse $311) to a gain in (or before) 3 months to $375, up almost +12%. At a 1.34 beta, that would gear up CRMT by +16%.
We have grave misgivings over the use of “beta” as a measure of Risk in Risk-Reward tradeoffs because its statistical calculation includes ALL deviations from the mean of price changes, both up and down, and lacks the necessary attention to which periods of time are relevant to the concerns of the subject investment at hand.
But here “beta” (almost by accident) is doing a useful thing of pointing out how poorly CRMT stock price changes are related to the usual overall market influences.
Little wonder, given the scale of several of the players at the table. And consider the “dealer” in the game, who knows what each of the players hold, and from prior encounters helping them add and remove (at different prices) from their portfolios, what the client institution regards as an “opportunity”.
The Market-Maker’s Risk-Reward measure
We find a much better gauge of likely risk and reward to come from the way MMs protect themselves while actively playing their essential roles in providing “market liquidity”. The side benefit of the hedging is that it defines the extremes of price, but not beyond, extremes which are worth spending protection money to avoid.
Those price extremes are pictured as vertical lines in Figure 3, and the heavy dots are the market quote of the stock on the date of the forecast. The imbalance between upside and downside price change prospects has implications for coming price change in the next few months.
The MMs’ upside price extreme targets are more effective than the downside ones, so we keep score on how frequently they are reached in the 3 months following the forecast.
In Figure 3, there are rows of data between the larger and smaller blue pictures. Those rows tell, from left to right, what are the prospective up and down price limits seen, along with the closing market quote, on the day of the forecast. Next is a measure of potential reward between that quote and the forecast high price limit. Following that is an average of the worst-case price drawdowns experienced in the next 3 months following prior forecasts having up-to-down proportions like this day’s.
Those prior forecast proportions are measured by the Range Index [RI], which tells what percentage of the whole forecast lies between the market quote and the forecast lower limit. The RI-selected sample of prior forecasts is the relevant history suggesting key outcomes which may result from holding this security during some or all of the next 3 months.
The next item in the row of data is the Win Odds, or what percentage of the RI forecast sample experiences were profitable when their prices reached or exceeded the upper limit (or were at a price above entry cost at the end of 3 months – a holding period time limit). The % Payoff tells the average net profit from all holdings in the RI sample, including losses from position closeouts forced by the holding time limit.
Here, for CRMT, the Win Odds of 94 out of 100 resulted from two loss experiences among the 33 priors in the RI sample. The +11.2% payoff average includes those two losses.
Because sample positions are closed out at first opportunity of reaching the upside target limit, the average number of market days held were only 33, not the full 63 of 3 months of 21 in a full market year of 252. The resulting CAGR of +127% would be an attractive capital gain experience for most portfolios.
Finishing the data row are the sample size of prior Range Indexes at the RI of 1 from the past 5 years of daily CRMT forecasts, and a credibility comparison of the % Payoff result with the earlier upside Sell Target Potential. Credibility ratios of above 1.0 are not common or frequent and 0.8 is comforting.
The data cited in the left Block Trader WEEKLY Forecast report is the same as the DAILY report on the right. The intention of the Weekly report is to provide more time-history visual perspective of CRMT experiences.
The colors of the vertical forecast bars emphasize the Range Index differences occurring across observation time as the market quote of the subject security moves in relation to the prior forecasts. The typical experience of price change following low RIs is rising prices. Often, high RIs are followed by static to declining prices, but with far less regularity than is the low RI outcome.
Why is CRMT an opportunity?
Figure 4 provides a look at the BTF reports for SPDR S&P 500 ETF presented in the same layout as Figure 3’s for CRMT.
Now, the small blue pictures at the bottom of Figures 3 and 4 become significant. They are of the distributions of Range Index measures over the past 5 years. Those for SPY are regularly-shaped and quite compressed horizontally in terms of RI (downside) value, but tall in the count of their presence.
The CRMT RI distributions are widely spread and irregular in their shapelessness. They indicate frequent experiences of irregular, volatile price moves. Risky moves? Perhaps.
The RI provides far better bettor opportunity for CRMT capital gain than does SPY. And by the way, the SPY bettors may be more monetarily motivated to make their large-scale bets than the smaller-scale bets getting made by individual investors in CRMT, who have far less help most of the time in knowing what to do. The MMs’ typical distraction lament of “no one can time the market” holds more true when “the market” refers to a multi-stock index than when the subject of attention is a specific security.
Interestingly, SPY at the moment is providing well-above-average Win Odds than it often does. Still, its % Payoff history at these average RIs has CAGR potentials exceeded by CRMT’s by a ratio of over 4 to 1.
If capital gain-based wealth-building is important to your equity portfolio, don’t commit cash capital to “the market” as readily as you might to America’s Car-Mart.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in CRMT over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Disclaimer: Peter Way and generations of the Way Family are long-term providers of perspective information, earlier 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 D-I-Y 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. We daily identify their view of best payoff equities, 20 each day. First months of 2020 to date have produced over 3100 profitable position closeouts at over +50% annual rates. Evidences of how such prior forecasts have worked out are routinely provided in the SA blog of my name.