overview of equity analysis james l. grant, ph.d. jlg research [email protected]
TRANSCRIPT
Overview of Equity AnalysisOverview of Equity Analysis
James L. Grant, Ph.D.
JLG Research
““Process of Investing”Process of Investing”
Goals and objectives-funding a future liability
Investment policy-asset allocation and style decision
Equity (and fixed income) strategy-active passive decision
Selecting the stocks (and bonds)Performance measurement
Types of Equity AnalysisTypes of Equity Analysis
Traditional Financial Analysis
Value-Based Metrics (VBM)
Discounted cash flow (DCF) analysis
Statistical/factor models
Price relatives and ratios (margins, ROE)
Free cash flow, EVA, and CFROI
DDM model, FCF model, EVA model
Regression analysis, BARRA, etc.
Players using Players using Stock Valuation ModelsStock Valuation Models
Boston Partners Asset Management (Fundamental catalyst) Credit Suisse/HOLT (CFROI) Centre Asset Management (Economic profit analysis) Deutshe Bank Securities (CROCI) Jacobs-Levy Equity Management (Long-short, market-
neutral in a complex equity market) JLG Research- Bottoms-up EVA approach and “Dow
Fundamental” State Street Global Advisors (SSGA)( Matrix equity) Stern Stewart Equity Research (PRVIT, “Prove-it”)
JLG ResearchP/E Versus Earnings Growth Rate:
US Equity Styles
0
1020
30
0 5 10 15 20
Earnings Growth Rate
P/E
Y
Predicted Y
Return onCapital
(operating condition)
Cost of Capital(risk profile)
Market Expectations of Future Performance
(valuation)
Stock Valuation Process:Stock Valuation Process:Key Elements of True Value:Key Elements of True Value:
JLG ResearchNPV/Capital versus EVA/Capital Ratio: 50 Largest Wealth Creators
y = 26.525x + 1.7762
R2 = 0.9269
y = -6.0078x2 + 36.573x + 1.3024
R2 = 0.9373
-10
0
10
20
30
40
50
60
-0.2 0 0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 1.8 2
EVA to Capital Ratio
MV
A to C
apital R
atio
Series1
Linear (Series1)
Poly. (Series1)
JLG Research
Dell
MSFT
KO
CSCO
INTC
MDT
Thank you!Thank you!