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Market in Pictures – October 2020

Company Financing

A recent chart reminded us of another reason why many investors prefer the US markets. Securitization, while often maligned, forces a mark to market transparency for assets, such as bank loans, that might otherwise distort reporting values as reported by the accounting principles known as GAAP. European and US companies finance themselves quite differently:

We suspect the large amount of loans, as opposed to bonds, used by European companies works against price discovery. Bonds that are marked to market, at times viscously, hold companies accountable and render a quick judgement on future prospects. Bank valuation is also improved and perhaps for this reason US banks command a higher valuation.

Related to this discussion on asset values is a current discussion on intangibles. The US market is home to more companies whose valuation is increasingly composed of intangibles. Investors relying on valuation frameworks reliant on inadequate measures of book valuation will be challenged.

Shipping Stocks

Some investors appear to have a growing affinity for using ESG criteria in the choice of stocks though we are suspect of the exact metrics. The reports we have seen, such as those from Dimensional Fund Advisors, show little additional information provided in the relationship between expected returns and carbon prices. This analysis, though, is backwards looking and we wonder if an aversion to energy related stocks, coupled with an affinity to other stocks whose valuation we struggle to understand, might present opportunities.

Next, we will look at NextEra Energy, which provides energy generation and distribution services.

Earlier this year, shipping stocks found some support as oil arbitragers sought to sell oil futures at forward dates while storing oil at sea. Additional support might be expected from additional growth now being signaled from the bond markets. Some shipping stocks such as Teekay Tankers (TNK) and Scorpio Tankers (STNG) are reported to trade at prices below their assert values, and investors may wish to look closer at these measures.


  • Applied Finance, a thought leader in valuation and portfolio construction, is a true “value” investment management company.  Unlike the majority of firms today that focus on low multiples to define “value”, we define value as identifying companies trading below their intrinsic value.  Our Valuation Driven™ approach forms the foundation of our investment decisions...more


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