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It’s a Wealth Creators Market

Over the last year or so we have seen a deluge of new information for investors to consider.  Extreme volatility in market prices, swings in valuation levels (which we have noted valuation gaps on several occasions: growth/valuelarge/smallhigh risk/low risk) and the constant emergence of thematic trades (ie. Work from Home, Reopening Plays) have created significant challenges for even the most disciplined investors. It is likely that investors without a disciplined, systematic approach have been left scrambling and relying on their luck in timing the next hot theme, often to the detriment of their client portfolios.

Applied Finance’s tracking of aggregate valuation levels is useful in helping investors identify times when buckets of securities that trade together become significantly over/undervalued. The main theme that has our attention is the ballooning valuation gap between wealth-creating companies returning capital to shareholders (High Financing Yield) and wealth-destroying, ownership diluting firms. We have always professed the benefits of investing in profitable companies that re-invest to grow their business, but at current levels we believe that this presents a unique tactical opportunity for investors.

Our co-founder discussed the recently launched Applied Finance Valuation Large Cap ETF that is driven by Financing Yield and Valuation, in an interview with Oliver Renick on the TD Ameritrade Network. We also had the pleasure of ringing the closing bell at the NYSE to commemorate the ETF launch, we look forward to discussing this new broad-based strategy with our subscribers that have interest.

Beyond these wealth-creating firms, Mr. Resendes identifies another bright spot in the market with Christine Idzelis (MarketWatch), he explains how GAAP accounting tends to undermine the profitability of big tech and how moving beyond accounting numbers helps us identify some mega-cap names on “super sale”.

Despite the market turmoil, the conclusion should always remain the same, buy companies that exhibit wealth-creating characteristics that are trading at a discount to their intrinsic value.

The Valuation Edge™ Newsletter Articles:

“Super Sale” on Big Tech and High-Quality Stocks – MarketWatch Interview
Our Co-founder, Rafael Resendes has been featured in a recent article by Christine Idzelis of MarketWatch. The piece details our Valuation Driven investing approach centered around intrinsic value & treating a company’s R&D as an investment not an expense.

Rafael Resendes interviewed on TD Ameritrade Network’s Market on Close
Our Co-founder, Rafe Resendes, discusses our firm’s intrinsic value factor approach and his view on using this and wealth creation to construct a portfolio with @Oliver Renick on @TDANetwork.

Navigating the Current Equity Landscape with an Emphasis on High Profits and High Growth
This study provides relevant insight regarding the role of profitability and growth in wealth creation; while AFG believes this concept is evergreen, there appears to be outsized benefit for investors to emphasize profitable, growing firms in the current investment landscape given the valuation agnosticism that has run rampant in investors.

Tactical Valuation Update – May 2021
Summary (upside):
•Large (-0.6%) > Small (-13.5%)
•Large Growth (4.2%) > Large Value (-9.4%)
•Small Value (-11.1%) > Small Growth (-15.0%)

We explore portfolio construction and factor premia valuation traits….

The Poor Valuation Characteristics of Dilutive Stocks
A large valuation gap has formed between stocks returning capital to shareholders vs. those reliant on external financing, creating a tactical opportunity. We have explored in detail to help our research partners incorporate this into equity allocations.

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