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July 21, 2019

“Value”:  Buy low price to something, some correlation with stocks trading below intrinsic value that add to outperformance

Value/Size: Buy low price to something stocks, tilt towards smaller stocks as they have larger implied equity returns due to risk

Value/Size/Quality: Buy low price to something stocks with a tilt towards small stocks that have a larger implied equity return due to risk, and layer on top higher ROI stocks to more closely approximate buying stocks below their intrinsic value.

Valuation Focused Investing™: Incorporate firm profitability, risk, growth, and competition to obtain an empirically validated estimate of a company’s intrinsic value, construct portfolios focused on companies offering the greatest discount to intrinsic value all other things equal.

The common perception of value investing is to purchase stocks that trade at a low price to “something”, where “something” is a fundamental variable such that more is good. For example earnings, book value, sales…

What such approaches are trying to achieve, is identify stocks trading below their intrinsic value, with the expectation that over time the market will close the value gap, ultimately resulting in portfolio alpha.

In practice price to “something” variables are noisy approximations for intrinsic value, but fortunately for users of such data, intrinsic value is such a powerful return factor that just being positively correlated to intrinsic allows such variables to create alpha.

In a quest to more closely approximate a stock’s intrinsic value, equity researchers constantly search for additional variables to nudge a price to “something” variable closer to intrinsic value.  Enhancements to the plain price to “something” formula include adding size and return on investment (quality) factors to improve simple value measures. The logic behind such additions are essentially –

Size – small firms consistently require a premium for their extra risk so all others things equal smaller firms will tend to generate excess returns.

ROI (quality) – higher ROI is associated with higher cash flow generation and in turn higher intrinsic valuation levels, thus all things equal higher roi firms will tend to generate excess returns.

Applied Finance Valuation Focused Investing™: Incorporate firm profitability, risk, growth, and competition to obtain an empirically validated estimate of a company’s intrinsic value, construct portfolios focused on companies offering the greatest discount to intrinsic value all other things equal.

Since 1995, Applied Finance has quietly built the world’s most comprehensive and longest dated real time database of equity intrinsic value estimates incorporating a consistent set of assumptions incorporating corporate performance, risk competition – the critical determinants to estimate intrinsic value.  Specifically, Applied Finance has performed over 20 million valuations and through this process developed unmatched expertise constructing valuation-oriented portfolios with a superior track record of outperforming categories averages, benchmarks, and peers.

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