Precept Capital Management is a hedge fund located in Dallas, Texas. The fund em- ploys several investment


Precept Capital Management is a hedge fund located in Dallas, Texas. The fund em- ploys several investment strategies, one of which is based on comparing the trajectory of stock prices to the trajectory of EPS forecasts. To illustrate the strategy, consider Exhibit 13-7, which displays these trajectories for the firm Gigamon through September 29, 2015. Precept portfolio manager Blair Baker points out that he perceives a possible trading investment opportunity when there is a divergence in direction between the forecasted EPS trajectory and the stock price trajectory. In Exhibit 13-7, such a diver- gence occurred in mid-2015 and continued through the end of September. Baker argues that changes in forecasted next-12-month’s earnings are highly correlated with share price changes. Therefore, he believes, investment opportunities exist for investors who are positioned in shares prior to what he anticipates the market will view as “surprise” changes to the next twelve month’s earnings forecast. In this exhibit, the firm’s guid- ance to analysts induces them to forecast an increasing pattern for EPS. Juxtaposed against the increasing pattern for EPS is a decreasing pattern for the firm’s stock price. Baker points out that in this case, the two patterns send diametrically opposite signals, and suggests that the information conveyed by the EPS signal is likely to be the more reliable. To investigate whether this is the case, Baker examines the underlying funda- mentals. In the case of Gigamon, he concluded that many of its sector peers had ex- perienced negative news during the period June through September, but not Gigamon. Gigamon describes itself on its web site as providing “active visibility into physical and virtual network traffic enabling stronger security and superior performance.

1. Describe Precept’s strategy in the context of different topics discussed in this chapter.

2. Exhibit 13-8 is analogous to Exhibit 13-7, but for the insurance firm Aetna, which was the subject of the minicase in Chapter 3. The minicase described Aetna CEO Mark Bertolini’s offering cautious guidance during a July 2013 conference call. Discuss whether he was wise to have expressed caution, and whether it makes sense to express caution generally about EPS for the subsequent 12 months and also the period between 12 and 24 months out.

3. Does Exhibit 13-8 suggest any profitable trading opportunities? If you believe that the answer is yes, describe what steps you would take next.

4. On the web site for this book, you will find an Excel file containing charts like Exhibits 13-7 and 13-8 for the stocks of other companies discussed in this book. Examine these charts, and discuss what they suggest about potential profitable trading opportunities.

Stocks or shares are generally equity instruments that provide the largest source of raising funds in any public or private listed company's. The instruments are issued on a stock exchange from where a large number of general public who are willing...
A portfolio is a grouping of financial assets such as stocks, bonds, commodities, currencies and cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and closed funds. A portfolio can also consist of non-publicly...
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