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Applied Finance believes a focus on valuation, not “value” is critical to maintaining a sustainable and repeatable edge in creating long term alpha. We call this approach Valuation Driven, as valuation is the main emphasis that drives our stock selection process.

Today, most manager rely on distorted price multiples or faulty discounted cash flow (DCF) approaches that do not capture the true underline value a company. For multiple investing, which is based on distorted accounting numbers, price to some fundamental variable, investors miss on the four major tenants of capturing value: Investment Growth, Economic Profitability, Risk, and Competition. While DCF models appear to be more robust than multiples, they are highly inaccurate due to perpetuity assumptions and erroneous risk inputs.

By focusing on economics rather than accounting, Applied Finance can more accurately measure corporate performance leading to more effective valuation answers.

The key to our approach is avoiding many of the unrealistic assumptions inherent to most valuation models (such as terminal values), while mitigating the behavioral biases analysts suffer from (falling in love or hating companies) when generating qualitative model inputs. While other investment firms claim to be intrinsic value investors, they lack the objective rigor and insights obtained from our deep database of valuations.

A sophisticated approach to valuation must effectively link corporate performance and valuation. We achieve this through a Valuation Driven investment philosophy.

  • The Gross Profitability Trap

    The Gross Profitability Trap “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 [...more]
  • Intrinsic Value Factor®

    February 4, 2019 Applied Finance

    Valuation 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]

  • Then and Now: Buyers Remorse Versus Sellers Loss

    October 31, 2008 Applied Finance
    Over the past couple months, worsening macro economic conditions, declining corporate profitability and a bottomless stock market have investors longing for the good old days when the economy delivered steady increases in GDP growth with [...more]
  • Economic Margin®

    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]