The Applied Finance investment approach is centered on understanding corporate performance from an economics perspective, and deriving intrinsic value estimates for corporations by incorporating economic profitability, growth, risk and competition. The end goal is to deliver long-term outperformance and risk mitigation.
Fundamentally Different: Instead of relying on distorted and noisy as-reported accounting data to understand corporate performance, our proprietary Economic Margin framework systematically reconstructs income statements and balance sheets to address issues such as: Inflation, R&D, Asset Intensity, Asset Age, Off Balance Sheet Assets and Liabilities, among many others. These adjustments provide a more complete view of a company’s underlying economic vitality.
Valuation-Driven: All of Applied Finance’s portfolios are Valuation Driven, which differs significantly from a “value” perspective. Traditional “value” approaches to finding undervalued stocks use a simple ratio such as P/E or P/B, or a mix of them. These “commodity factors” are widely available, providing no unique insights, and come with many shortcomings. On the other hand, our proprietary Valuation Driven approach incorporates economic profitability, growth, risk and competition to calculate a company’s intrinsic value.
Furthermore, by not using simple ratios or unrealistic perpetuity assumptions to determine intrinsic value, we pioneered the use of incorporating the established economic theory of competing away excess returns to properly estimate a firm’s intrinsic value.
Patience: Having performed over 20,000,000 company specific valuations, we understand the necessary properties and process to invest with a long-term perspective to allow markets to uncover the “intrinsic value gap” over time. We know it takes the market a little longer to figure out what we already know.
Disciplined and Repeatable: Since developing our Economic Margin framework and launching our research database in 1995, we have built proprietary factors and analyzed companies in a consistent manner. This live research database gives us an analytical advantage no other firm comes close to replicating.
It’s difficult to distill the vast amount of equity insights we have gained through these 20 plus years of live data, but five deserve highlighting.
- Valuation – Bubbles eventually pop, as buying assets below intrinsic value eventually leads to outsized returns
- Management Quality – Avoid management teams that pursue wealth destroying strategies
- Earnings Quality – Avoid companies with poor earnings quality
- Economic Momentum – Identifying companies exhibiting improving economic performance
- Price momentum – Identifying companies with positive long-term investor sentiment