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The Gross Profitability Trap

July 8, 2019 AppliedFinance

“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]

Valuation Driven

February 4, 2019 Applied Finance

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]

Economic Margin – Removing Market Noise

July 1, 2000 Applied Finance

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]