Good Short Term Risk Premium for the Duck

 “If it walks like a duck, quacks like a duck, looks like a duck, it must be a duck” – Chinese Proverb

Aflac’s stock (AFL) has had a rough go of it in 2014.  The stock is down almost 10% so far this year, while the S&P 500 continues to chug along and is now up about 8.5% ytd.  Although three quarters of their revenues come from Japan, Aflac has been trading in pretty good lockstep with the U.S. market for quite some time…..until this year.

Digging under the covers a bit, Q2 results were perceived as disappointing.  They beat on the earnings number, but revenues ticked down slightly and the stock dropped 10% at the end of July.  Part of the drag on numbers is thanks to the Yen’s weakness vs. the Dollar this year.  The stocks P/E looks cheap now compared to other major insurers and it’s possible the stock has simply fallen out of favor.  You can almost hear the duck screaming its name at investors and they just aren’t listening right now.

Fundamental investors are always digging to find companies they consider to be mispriced or undervalued situations.  Uncovering these opportunities requires great skill and effort.  On top of that, many managers are placing growing scrutiny on investments that represent a good “risk premium”.  The terminology changes often, but essentially investing in companies that they feel have high upside and low downside.  Not only is it difficult to find companies with a good risk premium, but that definition can often times be subjective.  Finding opportunities that are considered both undervalued, with a great risk premium?  Yikes!

EidoSearch generates return probabilities based on historical market reaction to similar price trends and environments.  Where traditional models use normal distributions to calculate return projections, EidoSearch uses ACTUAL return distributions which provide investors with an edge and return projections that have been researched to hold true across various market conditions.  These predictive analytics can provide powerful support to the fundamental investment process, and provide a statistical, objective response to questions like, “does this represent a good risk premium?”.

We took a look at Aflac’s (AFL) current 3 month price trend and found 90 similar instances historically.  How do investors typically react to this price trend?

The average return of the most similar historical matches in the next 1 month is 5.4% and there’s 85% probability the price will be above $58.88 (just about its current price) in 1 month with 10x the upside to downside.

Aflac Stock (AFL)

If it walks like a duck, quacks like a duck, looks like a duck…..it must be one.  It looks like a good idea to us.

Have a great week!

 Replicating the Market Call (Clients Only)

·  Simply type in the symbol and hit the 3M-1M button for the projection

·  Scroll down to capture historical comps, and for further detail and transparency supporting the analytics