It is important to remember that markets attempt to see through temporarily good or bad times to estimate future cash flows and set current valuations. The global health and economic crisis resulting from COVID19 has created one of the greatest periods of uncertainty for market participants to see through, therefore, the fastest plunge of the US stock market ever recorded took place last month. Entering the 2nd week of April, we believe the market participants have likely concluded this is indeed a “temporary” situation, and have now started shifting focus to the recovery of the US economy and other developed regions, which will likely happen in the 2nd half of 2020 and 2021 […more]

The uncertainty of the timeline for a “return to normalcy” has created liquidity concerns across practically all economic sectors. Companies of all sizes and levels of financial strength are drawing on open lines of credit to weather worst case scenario contagion estimates.  Commercial landlords will likely see missed rent payments with little demand to lease shuttered storefronts, while rising unemployment may lead to a spike in residential mortgage and rental delinquencies; this has clearly impacted the recent performance of financial stocks, REITs and mortgage insurers.

To continue to help our clients navigate the economic impacts of the pandemic, we have updated market performance data from the previous write-up to include last week’s historic sell-off […more]

Only in 2008 have valuations been as attractive as now. Today, the market is essentially pricing in 0% sales growth over the next five years, not as harsh as the -15% priced in during the 2008 lows, but very harsh compared to the expected 20% to 30% growth these firms have typically delivered over a five year period. Unlike 2008 there will not be liquidity issues driving economic decisions and panicking investors. This is a confidence crisis similar to 9/11. As medical policy catches and surpasses the virus, confidence will return and economic activity will march forward. Already, in China, restaurants have reopened to crowds, and society is returning to business as usual. […more]

The past four weeks have been surreal. The S&P500 lost nearly 30% of its value with extreme volatility day in and day out, and the busiest cities in the US and most of Europe are in lockdown. What happened in China is happening to a lot of us, and we didn’t expect that. No country can fully prepare for events like this, unless they have experienced something similar before. Singapore, Taiwan, Hongkong, and South Korea have done a commendable job responding to Covid-19, possibly because they had the painful experience dealing with SARS (2003) and learned from it. The US […more]

Christoph Gisiger:

The crash came out of nowhere: In just a few weeks, stocks have entered bear market territory, investors are facing the biggest setback since the financial crisis. However, Rafael Resendes doesn’t expect a similar scenario like the Great Recession of 2008/09. The Co-founder of the value investment firm Applied Finance warns against panic selling and thereby missing powerful rallies when the outlook brightens up. […more]

Applied Finance has aggregated recent performance over the last several weeks to help fully understand the recent market drop’s impact through various sector, style, factor, and industry lenses. We have also compiled updated percent to target median charts to better understand current valuation levels normalized against historic averages. We present this data today with limited commentary, as we will explore this in much more detail in next month’s quarterly write-up. In the meantime, a few main observations […more]

The US equity markets have fallen sharply the past week on concerns of the coronavirus disease 2019. This novel coronavirus affects the respiratory system, was first identified in Wuhan, China more than two months ago, [...more]

The insights delivered by this study are truly fascinating.  On one hand, the evidence that price multiples are incomplete in forming a definition of value is obvious, and this should align with intuition.  If broader market participants heed this advice, this study will have been a noble effort to improve the flow of accounting information and analyst forecasts into market prices.  On the other hand, there has never been obvious justification for measures of cheapness to define value in the first place.  Many investors simply use these factors out of convenience or tradition, while many others invest in products built upon them with little understanding of the classification error they introduce.  […more]

2019 was a triumphant year for the US large cap equity market, with the S&P500 index up 31% on a total return basis. The resolution of two major concerns in the year, namely the US [...more]

Despite decades of academics and practitioners promoting the ”value factor”1, it generates marginal to no long-term alpha. We believe four reasons have contributed to slow the discovery process from the current accepted “value” regime (low price to something) towards a more robust and realistic true value regime (worth measured independent of market price and focused on the value of future cash flows).
1. No theory.  There is no clear link between commonly used “value” variables and true value.  Yet academics and practitioners have developed no viably accepted competing perspective to explain future returns […more]

100 mph pitchers are a rare and treasured commodity, simply because they have been among baseballs’ most effective players. The mention of Randy Johnson, Nolan Ryan, JR Richardson, Bob Feller, all elicit reverence for their amazing careers. Yet what of Steve Dalkowski who Ted Williams once faced off against and said – I could not see the ball […more]

“But this time, it’s different!” More foolish words are rarely spoken in the financial industry, but they always seem to find their way back into the stock market lexicon. A firm’s intrinsic value should always be a function of discounted future cash flows that incorporate a comprehensive understanding of profitability, growth, competition, and risk. Occasionally, alternative approaches can find favor in enough market participants’ stock selection to distort the foundational understanding of firm value. […more]

Intrinsic Value Driven™ Investing begins and ends with calculating the intrinsic value of every stock in a benchmark against which a portfolio is constructed, and comparing those values against traded prices. All of Applied Finance’s portfolios are Intrinsic Value Driven™, which differs significantly from a “value” perspective. To gain a better understanding into Applied Finance’s Intrinsic Value Driven™ approach, let’s first review traditional approaches to “Value”.

The traditional approaches to finding undervalued stocks use a simple ratio such as P/E or P/B, or a mix of them. These common approaches to value come with many shortcomings: […more]

A corporate performance metric should provide insights into what a firm is worth. Most money managers utilize common earnings-based measures of corporate performance and value, which are suspect and easy to manipulate. Applied Finance developed the Economic Margin (EM) framework to remove the noise inherent in accounting data.

Traditional accounting-based valuation methods provide an incomplete view of a company’s value by not accounting for the investment needed to generate the earnings, cost of capital, inflation or cash flow. […more]