Facebook’s Risk Profile

“The biggest risk is not taking any risk…..in a world that is changing really quickly, the only strategy that is guaranteed to fail is not taking risks.” – Mark Zuckerberg

After peaking at $72 in mid-March, Facebook’s stock price has been pretty choppy. The price dropped all the way back to $56 by the end of April, but has since recovered and sits at $66.34 as of Friday’s close.  They announce earnings on July 23^rd, and until that time the next couple of weeks will continue to be filled with modeling the growth in subscribers, engagement, ad revenues and earnings growth to determine if Facebook is a good investment or if it’s time to sell.  What if you knew the range of outcomes?

Based on past response to similar instances of Facebook’s current price trend, there’s an 85% probability the stock price will be above $62 in 1 month, and that the upside opportunity to the downside is 4 to 1.

Per the chart below, you can see that the orange bounds (standard deviation up and down from the mean) range from a price of $62 to $82.  With the price currently at $66.34, the most likely range for the next 1 month is from $4 down from the current price to $16 up or a 4-1 ratio to the upside.  This provides a great risk profile for holders or potential investors in Facebook.

EidoSearch has looked at millions of return predictions over 8 years of history to confirm these facts.  How?  Using history.  We’ve seen this price trend in Facebook hundreds of times before with high similarity.  We as humans already recall many of these times which shape our experience when making investment decisions, or any kind of decision for that matter.  For the golfers out there, say you belong to a club and every week you play the same Par 4 that’s 400 yards and has a really narrow fairway.  It’s of course tempting to hit driver to have a short iron into the green, but most golfers don’t.  Why?  Because they’ve played the hole hundreds of times over the years, and when hitting the driver have ended up in the trees more often than when they hit an iron off the tee.  We might not recall the specifics of each and every shot, but we remember a lot of them and our brains through associative memory DO recall each instance to form our opinion that it’s not worth the risk.

EidoSearch technology applies the same approach that humans do to decision making, using experiences (associative memory) to understand the range of likely outcomes by capturing the historical instances of statistically similar patterns going back through history.  We are able to do this objectively, through mathematics, to determine if there’s consistency in the responses to these similar environments.  Where there is consistency, like with Facebook’s current price trend, there’s predictive nature.

Having this as a starting point is powerful for fundamental investors for idea generation, where they can be alerted to the companies that set up well for them to apply their fundamental research efforts to.  But, this is just scratching the surface on the benefits of having these types of statistics as a backdrop to fundament investment and trading efforts:

• Making investments with good risk profiles (long or short positions)
• Portfolio monitoring
• Entry points for building or trimming positions
• Reaction to events

EidoSearch literally searches through hundreds of millions of patterns every day across thousands of securities to alert our clients to investment situations with the best probabilities to outperform or underperform.

We hope you have a great week.

Replicating the Market Call in EidoSearch (Clients Only)

• Go to New Search tab and type in FB and hit Enter
• At the top right of the chart, click on the 3 month pattern length button and then hit Search button
• The projection chart will provide additional underlying analytics like comps, timelines and forward return profiles