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Investment Thesis
The trade-commission-free automation progress achieved by markets in serving a continuing flow of individual investor internet-order small trades makes it necessary for Market-Makers to have capital at risk while handling the irregular huge-value “institutional” transactions. They protect their at-risk capital endangerment by hedging actions which reflects the coming price range expectations of the stocks involved – virtually all of the actively-traded issues.
The pricing and structure of such hedges reveal the coming-price expectations of both the MM protection-buyers and that of the MM industry protection-sellers.
Our selection of ZIM Integrated Shipping Services Ltd. (NYSE:ZIM) is prompted by its currently-attractive stock pricing coupled with a large following of Seeking Alpha readers.
Description of Subject Company
“ZIM Integrated Shipping Services Ltd., together with its subsidiaries, provides container shipping and related services in Israel and internationally. It provides door-to-door and port-to-port transportation services for various types of customers, including end-users, consolidators, and freight forwarders. The company also offers ZIMonitor, a premium reefer cargo tracking service. As of December 31, 2021, it operated a fleet of 118 vessels, which included 110 container vessels and 8 vehicle transport vessels, of which four vessels were owned by it and 114 vessels are chartered-in; and network of 70 weekly lines. The company was incorporated in 1945 and is headquartered in Haifa, Israel.”
Source: Yahoo Finance
Yahoo Finance
Risk~Reward Comparisons of Portfolio Investment Candidates
Figure 1
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The tradeoffs here are between near-term upside price gains (green horizontal scale) seen worth protecting against by Market-makers with short positions in each of the stocks, and the prior actual price drawdowns experienced during holdings of those stocks (red vertical scale). Both scales are of percent change from zero to 25%.
The intersection of those coordinates by the numbered positions is identified by the stock symbols in the blue field to the right.
The dotted diagonal line marks the points of equal upside price change forecasts derived from Market-Maker [MM] hedging actions and the actual worst-case price drawdowns from positions that could have been taken following prior MM forecasts like today’s.
Our principal interest is in ZIM at location [3]. A “market index” norm of reward~risk tradeoffs is offered by SPDR S&P500 index ETF at [1].
Those forecasts are implied by the self-protective behaviors of MMs who must usually put firm capital at temporary risk to balance buyer and seller interests in helping big-money portfolio managers make volume adjustments to multi-billion-dollar portfolios. The protective actions taken with real-money bets define daily the extent of likely expected price changes for thousands of stocks and ETFs.
This map is a good starting point, but it can only cover some of the investment characteristics that often should influence an investor’s choice of where to put his/her capital to work. The table in Figure 2 covers the above considerations and several others.
Comparing Alternative Investments
Figure 2
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Column headers for Figure 2 define elements for each row stock whose symbol appears at the left in column [A]. The elements are derived or calculated separately for each stock, based on the specifics of its situation and current-day MM price-range forecasts. Data in red numerals are negative, usually undesirable to “long” holding positions. Table cells with yellow fills are of data for the stock of principal interest and of all issues at the ranking column, [R]. Pink cell fills note below-desirable content of long-position holdings. Today market-circumstances create marginal conditions for the SPDR S&P500 ETF forecast, but are not intended as a market forecast.
Readers familiar with our analysis methods may wish to skip to the next section viewing price range forecast trends for INSP.
Figure 2’s purpose is to attempt universally comparable measures, stock by stock, of a) How BIG the price gain payoff may be, b) how LIKELY the payoff will be a profitable experience, c) how soon it may happen, and d) what price drawdown RISK may be encountered during its holding period.
The price-range forecast limits of columns [B] and [C] get defined by MM hedging actions to protect firm capital required to be put at risk of price changes from volume trade orders placed by big-$ “institutional” clients.
[E] measures potential upside risks for MM short positions created to fill such orders, and reward potentials for the buy-side positions so created. Prior forecasts like the present provide a history of relevant price draw-down risks for buyers. An average of the most severe ones actually encountered are in [F], during holding periods in effort to reach [E] gains. Those are where buyers are most likely to accept losses.
[H] tells what proportion of the [L] sample of prior like forecasts have earned gains by either having price reach its [B] target or be above its [D] entry cost at the end of a 3-month max-patience holding period limit. [I] gives the net gains-losses of those [L] experiences and [N] suggests how credible [E] may be compared to [I].
Further Reward~Risk tradeoffs involve using the [H] odds for gains and the 100 – H loss odds as weights for N-conditioned [E] and for [F], for a combined-return score [Q]. The typical position holding period [J] on [Q] provides a figure of merit [fom] ranking measure [R] useful in portfolio position preferences. Figure 2 is row-ranked on [R] among candidate securities, with ZIM yellow-row identified.
Along with the candidate-specific stocks these selection considerations are provided for the averages of over 3,000 stocks for which MM price-range forecasts are available today, and 20 of the best-ranked (by fom) of those forecasts, as well as the forecast for S&P500 Index ETF (NYSEARCA:SPY) as an equity market proxy.
Recent Trends in MM Price-Range Forecasts for ZIM
Figure 3
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This picture is not a “technical chart” of past prices for ZIM. Instead, its vertical lines show the past 6 months of daily price range forecasts of market actions yet to come in the next few months. The only past information there is the heavy dot of the closing stock price on the day of each forecast.
That data splits the price range’s opposite forecasts into upside and downside prospects. Their trends over time provide additional insights into coming potentials, and helps keep perspective on what may be coming.
The small picture at the bottom of Figure 3 is a frequency distribution of the Range Index’s appearance daily during the past 2 years of daily forecasts. The Range Index [RI] tells how much the downside of the forecast range occupies of that percentage of the entire range each day, and its frequency suggests what may seem “normal” for that stock, in the expectations of its evaluators’ eyes. A RI of 21, about 1/5th of the range, leaves the other 4/5ths (79%) of the price change potential to the upside.
Here the present level is near its least frequent, lowest-cost presence, encouraging the acceptance that we are looking at a realistic evaluation for ZIM. Nearly all past RIs have been above the present RI, indicating there is more room for an even more positive outlook.
The one reasonable caution for ZIM is that we have only slightly more than one 252-market-day year to produce prior forecast histories, when our standard is to accept only those stocks with market maturities of at least 3 years, or 750+ market days. The initial bullet-point comments of this article reinforce the essential nature of the Maritime Shipping industry to world commercial activities in a post-pandemic period with warfare disturbances. ZIM is evidently an effective competitor among alternative investment candidates for positions in a wealth-building portfolio focused on growth by capital gain holdings. You may feel differently and there are other choices with more history and smaller gain records.
Investment Candidates’ Prior Profitability Prospect
Figure 4
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This comparison map uses an orientation similar to that of Figure 1, where the more desirable locations are down and to the right. Instead of just price direction, the questions are more qualitative: “how big” and “how likely” are price change expectations now?
Our primary interest is in ZIM’s qualitative performance, particularly relative to alternative investment candidate choices. Here ZIM is at location [4], the intersection of horizontal and vertical scales of +24% gain and +100% assurance (ODDS) of a “win”.
Golar LNG Limited (GLNG) at [8] offers a similar size payoff based on a limited number of examples, but over a full 5-year history. No perfect alternative is available, with Eagle Bulk Shipping (EGLE) providing a slower rate of gain due to longer holding periods, but with competitive odds of profitable outcomes.
As a market norm, SPY is at location [6] with a +6% payoff and a 75% assurance of profitability. ZIM tends to dominate all the return payoffs in this comparison.
Conclusion
Among these alternative investments explicitly compared, ZIM Integrated Shipping Services Ltd. appears to be a logical buy preference now for investors seeking near-term capital gain.
Question: Is this form of comparisons more or less useful to you in your investment choice selections than one geared to industry economics or competitive actions?
