Engineering exists in investments, too, in activities like communications, information technology, securities design, and regulatory adaptations.
When the whole back-office of the securities industry gets computerized, the expensive human-labor component becomes minimized to the point where there’s no need to charge a fee every time a share changes hands between investors. And when small trades occur continually, records get kept.
But when securities worth multi-millions of dollars in one lump changes hands, there’s a serious profitmaking event worthy of a substantial fee. So, a way gets arranged to get both activities done, legally and under adequate control.
And interestingly, it involves recorded actions which identify the coming price expectations of the big-volume trading parties. With records which can later be compared with actual market outcomes to reveal how well the then-underlying expectations could be believed, and perhaps even similar beliefs useful now for the near future.
This article will use that approach to tell how much more profit there is likely to be made by and from Schnitzer Steel Industries, Inc. (NASDAQ:SCHN).
Description of the Subject Company
“Schnitzer Steel Industries, Inc. recycles ferrous and nonferrous metal, and manufactures finished steel products worldwide. The company acquires, processes, and recycles salvaged vehicles, rail cars, home appliances, industrial machinery, manufacturing scrap, and construction and demolition scrap. It offers recycled ferrous metal, a feedstock used in the production of finished steel products; and nonferrous products. The company also procures salvaged vehicles and sells serviceable used auto parts from these vehicles through its 50 self-service auto parts stores in the United States and Western Canada. In addition, it produces various finished steel products using ferrous recycled metal and other raw materials, as well as semi-finished goods, which the company sells to steel mills, foundries, refineries, smelters, wholesalers, and steel service centers. Schnitzer Steel Industries, Inc. was founded in 1906 and is headquartered in Portland, Oregon.”
Steel Industry Competitor Investment Alternatives
(Used with prior permission.)
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 interim actual price draw-downs 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 draw-downs from positions that could have been taken following prior MM forecasts like today’s.
Our principal interest is in SCHN at location . A “market index” norm of reward~risk tradeoffs is offered by SPDR S&P500 index ETF at .
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 hedging actions taken with real-money bets define daily the extent of likely expected specific 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
(Used with permission.)
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].
Readers familiar with our analysis methods may wish to skip to the next section viewing price range forecast trends for SCHN.
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 draw-down 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 SCHN 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 MM Price-Range Forecast Trends for SCHN
(Used with prior permission.)
This picture is not a “technical chart” of past prices for Schnitzer Steel Industries, Inc. 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 5 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 only 3 (out of 100), leaves the other 97% 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 SCHN. Nearly all past RIs have been above the present RI, indicating there is more room for an even more positive outlook.
Among these alternative investments explicitly compared Schnitzer Steel Industries, Inc. appears to be a logical buy preference now for investors seeking near-term capital gain.