A Cool, Calm Market Calculator

It's not an oracle, but the online oddsmaker called PAT can help you get a handle on hype from stock analysts

Will Cisco Systems' (CSCO ) stock rebound to $30? Are shares in General Electric (GE ) set to reach a new high under its new CEO? Can Fidelity Magellan Fund recoup for investors what it lost them during 2001?

I wish I could offer conclusive answers to these questions and many others. No one can, but I will point you toward a free online tool that promises to help investors estimate the odds that a stock, mutual fund, option, and even a market index will reach a target price. It goes by the name PAT, for Price Acceptability Tester. You will find a link to it at a low-profile investor site called RiskGrades.com, where you can test PAT, as I did recently (www.riskgrades.com). Cisco at $30? PAT says there's a 65% chance it will hit that within a year. A new high for GE? PAT gives it a 42% chance in the next 12 months. Fidelity Magellan making back its 2001 losses? A 71% chance by this time next year.

Can PAT be absolutely sure? Of course not, but PAT's operator, New York City-based RiskMetrics, suggests PAT offers a quick, statistically sound second opinion on almost any of the investment forecasts spewed out daily. "It's a reality check for anybody who hears a price target," Michael Thompson, RiskMetrics' market strategist, told me. A 1998 spin-off of J.P. Morgan, RiskMetrics mostly serves institutional investors. It sells them software and data they use to get a handle on the risk in such Frankensteins of Wall Street as collateralized debt obligations. RiskMetrics also hopes to win as clients financial advisers to individual investors. PAT is one of a host of software tools it offers them.

PAT works first by determining how risky a stock has been, measured by the volatility of its price swings over the past 152 trading days. Next, it considers the past seven years' average annual stock market returns for the stock's industry group. PAT assigned Cisco, for example, a risk rating about three times as high as the average security and an expected annual return of 12.1%. Disagree with either or both of those assumptions? PAT lets you adjust them up or down. It then goes on to reckon the odds that a stock will hit a given target price over the next 3, 6, or 12 months.

RiskMetrics prominently warns users against trading on PAT's conclusions without also using fundamental research into a company's prospects--not to mention common sense. A good thing, because in some extreme circumstances PAT renders nonsense: When I checked the probability of Enron (ENE ) zooming from its recent $1 a share past its peak of over $90, PAT suggested a 46% likelihood in the next year. It judged those odds based on Enron's huge recent volatility and the assumption that what can swing down also can swing up. In this case, I don't think so.

STRIKE PRICE. All the same, PAT could prove useful to many individuals in at least two ways. First, it offers an independent check on targets set by Street analysts and gurus. How likely is it, say, that the Standard & Poor's 500-stock index will hit a new high in the next year? Basing its conclusion on the index' historic volatility and returns, PAT says the odds are no better than 30%. PAT could obviously prove wrong, because the past can't predict the future. But the burden is on whoever sets an improbable target to suggest how the odds may be upset.

Second, anyone with employee stock options must guess how far beyond the options' strike price their company's stock may go. If you hold options with a strike price of $40 a share, and the company's stock is now $50, for example, you need to estimate the likelihood that the stock will climb to, say, $60 or $70. While you know far more about your company's profit outlook than does PAT, it can bloodlessly assess prospects for the shares in the stock market. Putting you and PAT together this way should boost the odds of finding better answers to some tough questions.

By Robert Barker

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