21st The secular rhythms of technological change and rational behavior (not emotional reactions) are seriously disrupting the commonly accepted productive investment strategy of the 20e century.
A necessary change is the shortening of forecasting horizons, with a shift from the passive multi-year buy-and-hold approach to the active strategy of achieving specific price or equity change targets over time, with reinvestment set at new targets in the shorter term.
The Consulting-Engineering industry has experienced severe disruption during the Covid-19 pandemic, and few participating companies have been able to control their profits. Tetra Tech, Inc. (NASDAQ: TTEK) a production manager, has more dimensions under his control than many.
Description of Equity Subject Company
“Tetra Tech, Inc. provides consulting and engineering services worldwide. The Company operates through two segments: Government Services Group (GSG) and Commercial/International Services Group (CIG). The GSG segment serves federal, state and local governments and development agencies in the areas of water resources analysis and management, environmental monitoring, data analysis, government consulting, waste management and a range of general civil infrastructure planning and engineering design contracts. The CIG segment provides early data collection and monitoring, data analysis and information management, feasibility studies and assessments, applied science and engineering research, engineering design, project management and operation and maintenance services. Tetra Tech, Inc. was founded in 1966 and is headquartered in Pasadena, California.
Source: Yahoo Finance
These growth estimates were made by and are gathered from Wall Street analysts to suggest what conventional methodology is currently producing. The typical variations between forecast horizons of different time periods illustrate the difficulty of making value comparisons when the forecast horizon is not clearly defined.
Risk-reward balances among consulting engineering industry participants
(Used with permission.)
The risk dimension is that of actual price declines at their most extreme while being held in the previous pursuit of upward rewards similar to those currently seen. They are measured on the red vertical scale. Reward expectations are measured on the green horizontal scale.
Both scales are percent change from zero to 25%. Any stock or ETF whose current risk exposure exceeds its reward outlook will be above the dotted diagonal line. The attractive buy issues for capital gains are found in the down and right directions.
Our main interest is in TTEK at the location . A standard “market index” of reward~risk trade-offs is offered by SPY at to the right of 10. More attractive by this Figure 1 view for wealth-building investors may appear to be SPY, but Figure 2 should reveal why this may not be the case.
Comparison of the competitive characteristics of Consulting Engineers
The Figure 1 map provides a good visual comparison of the two most important aspects of every short-term stock investment. There are other aspects of comparison that this chart sometimes doesn’t communicate well, especially when broad market outlooks like SPY’s are involved. Where “how likely” questions are present, other comparative tables, such as Figure 2, may be helpful.
The yellow highlighting of table cells emphasizes factors important to stock valuations and the most promising near capital gain TTEK stock, ranked in the column [R].
(Used with permission.)
Why do all these calculations?
The purpose of Figure 2 is to attempt universally comparable answers, stock by stock, on: a) HOW SIGNIFICANT the potential price gain might be; b) the likelihood that the gain will be a profitable experience; c) how long can this happen; and d) what RISK of price declines may be encountered during its active holding period.
Readers familiar with our analytical methods after a quick review of Figure 2 you may wish to skip to the next section Forecast Price Range Trends for TTEK.
The column headers in Figure 2 define the investment choice preference items for each row stock whose symbol appears to the left in the column [A]. The elements are derived or calculated separately for each stock, depending on the specifics of its situation and the current forecast of the MM price range. Data in red numbers is negative, generally undesirable for “long” holding positions. Table cells with yellow fills contain data for stocks of primary interest and all issues in the ranking column, [R].
Column price range prediction limits [B] and [C] be defined by MM’s hedging actions to protect the firm’s capital which must be exposed to the risk of price changes from volume trade orders placed by large $”institutional” clients.
[E] measures the potential upside risks for the short MM positions created to fill these orders and rewards the potentials for the buy positions thus created. Past forecasts like this provide a history of pertinent risk of lower prices for buyers. The most severe actually encountered are found in [F]during the periods of maintenance in the effort to reach [E] earnings. This is where buyers are emotionally most likely to accept losses.
The range index [G] indicates where today’s price stands in relation to the MM community’s predictions of the upper and lower bounds of future prices. Its figure is the percentage proportion of the full forecast low to high view below the current market price.
[H] indicates what proportion of the [L] sample of similar balance prior forecasts made gains by causing the price to reach its [B] target or be above sound [D] cost of entry at the end of a maximum holding period limit of 3 months. [ I ] gives the net gains-losses of those [L] experiences.
What makes TTEK most attractive within the group today is its ability to produce capital gains most consistently at its current operational balance between share price risk and the reward at the range index. [G]. Credibility of the [E] bullish outlook as evidenced by the [I] the gain to +7.7% is presented in [N]. For TTEK, it’s 0.91 or 9+ out of 10.
Other reward-risk trade-offs involve the use of [H] win odds with loss odds 100 – H as weights for N-conditioned [E] and for [F]for a combined yield score [Q]. The typical job retention period [J] on [Q] provides a symbol of merit [fom] ranking measure [R] useful in portfolio position preference. Figure 2 is arranged by row on [R] among alternative candidate stocks, with TTEK at the top.
In addition to candidate-specific stocks, these selection considerations are provided for the averages of some 3,000 stocks for which MM’s price range forecasts are available today, and 20 of the top-ranked (per of) of these forecasts, as well as the forecast for the S&P 500 Index ETF as a proxy for the stock market.
The current SPY market index is not competitive as an investment alternative. Its range rating of 34 indicates 2/3rds of its forecast range is on the upside, but only about 8 out of 10 previous SPY forecasts at this range index have produced profitable results.
As shown in column [T] in Figure 2, these levels vary considerably from stock to stock. What matters is the net gain between the investment gains and losses actually realized following the forecasts, shown in the column [I]. The odds of winning [H] indicates what proportion of the sample IRs of each stock was profitable. Ratings below 80% have often proven to be unreliable.
Recent Trends in Main Topic Forecasts
(Used with permission.)
Many investors confuse any repetitive picture of stock prices with typical “technical analysis” graphics” of past stock price history. These are quite different in their contents. Instead, here the vertical lines in Figures 3 and 4 are a daily updated visual registration of price scale provide limits expected in the coming a few weeks and months. The thick dot in each vertical is the closing price of the stock on the day the forecast was made.
This market price level explicitly defines the price reward and risk exposure expectations that were held by market participants at the time, with a visual display of their vertical balance between risk and reward.
The measure of this balance is the Range Index (RI).
With today’s IR, an upward price change of 8.5% is in prospect. Of the 123 previous predictions like today’s IR, 107 were profitable. Market actions from past forecasts turned into realizations of +7.7% gains in 37 market days. Thus, the benefit of history could repeat itself six or more times in a year of 252 market days, which translates to a CAGR of +66%.
Also note the smaller lower image in Figure 3. It shows the distribution of the range indices for the past 5 years with the current level marked visually. For TTEK, by far the largest proportion of recent past forecasts were for prices and range indices higher than today.
Based on direct comparisons with other construction competitors, there are several clear reasons to prefer a value seeking buy Tetra Tech, Inc. compared to the other investment alternatives examined.