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Applied Finance has a disciplined approach to stock selection and company replacements in our strategies. Our objective is to remove analyst bias while taking advantage of their expertise once a company has met our criteria.

Buy Discipline: 5 step process

Idea generation: Baseline valuation screen for top 30% undervalued stocks within each sector

Qualification Analysis: Company Track record, Model accuracy, does company meet criteria?

In-Depth Analysis: Valuation sensitivity analysis, detailed model calibration

Decision Deliberations: Catalysts, Diversification/Concentration analysis, Risk analysis

Committee Decision: Analyst presents ideas and supporting research for committee vote. Super majority needed.

Sell Discipline: 5 Step Process

Typically, companies that are considered for replacement have met their intrinsic value and offer little upside, the fundamentals of a company have deteriorated, or there is less confidence in the original assessment of a company which prompts reevaluation of the position.

Sell Flag: Baseline valuation screen for existing holdings in bottom 50% of sector.

Sell Alert: Look for companies with negative valuation upside or high embedded expectations.

Compare/Contrast with Replacement Ideas: Valuation and fundamental strength comparison as well as how the trade would affect the risk/exposure for each sector and the portfolio as a whole.

Decision Deliberation: Absolute and Relative Valuation assessment, correlation/concentration analysis with existing names.

Committee Decision: Analyst presents Sell thesis and models to committee for vote. Super majority approval is needed for any action.

  • 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]