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Join The Valuation Edge™ monthly newsletter to receive Valuation Driven® insights!

The Valuation Edge is Applied Finance’s monthly newsletter to share our valuation insights with the investment community.  Our goal is the 3EEE’s… Entertain, Engage, and Enlighten the investment community through what we consider to be interesting market observations, economic facts, and company expectations, to better frame the current investment environment.

We hope you join and interact with us on what promises to be an interesting long-term journey through buys, sells, and holds.

POPULAR ARTICLES:

Growth Stocks Approaching Valuation Levels Last Observed During Tech Bubble
August 11, 2020

While we rarely make huge market calls and remain reluctant to do so at this point, its worth noting that growth stocks are trading at below -1.5 StdDev from historical normal levels signaling a significant move outside of normal range. This is especially noteworthy, as the growth relationship in the Russell 1000 is now at levels last observed in the peak of the tech bubble.

The False Bargain of Passive Investing
July 14, 2020

Today the irony continues, as the intellectual foundations in financial economics that underpinned Bogle’s incredible success are much less robust than they appeared in the early 70’s, yet the push for passive investing is stronger and more fervent than ever. For proactive, process-oriented, intelligent advisors this will create a great opportunity to distinguish yourself from the growing herd of “commodity” advisors who preach little more than fee minimization, rather than alpha generation or negative alpha avoidance.

Emotional Unease Creates Generational Wealth Opportunity
March 19, 2020

Only in 2008 have valuations been as attractive as now. Today, the market is essentially pricing in 0% sales growth over the next five years, not as harsh as the -15% priced in during the 2008 lows, but very harsh compared to the expected 20% to 30% growth these firms have typically delivered over a five year period. Unlike 2008 there will not be liquidity issues driving economic decisions and panicking investors. This is a confidence crisis similar to 9/11. As medical policy catches and surpasses the virus, confidence will return and economic activity will march forward. Already, in China, restaurants have reopened to crowds, and society is returning to business as usual.

ECONOMIC MARGIN® 
Jun 25, 2000

Since the motivation for value-based metrics has been well documented, we will not dwell on the subject beyond a few paragraphs. In short, value-based metrics have become popular for two reasons. First, capital markets have forced money managers and corporations to have a renewed focus on the balance sheet. In other words, corporations are not only expected to generate positive earnings and sales growth, they also must provide an adequate return on the money they have invested. Second, accounting information, although necessary, does not by itself adequately explain market valuations nor provide comparability between firms. Exhibit 1 examines the link between earnings growth and P/E multiples for the industrial companies within the S&P 500.

VIEW MORE ARTICLES

  • 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]