Value Investing
In May 2022, I reviewed 3 books on value investing which I summarize in the link:
From reading these books, the following distinctions occurred to me:
- there is a simple 2D value/price qudrant, with Graham stocks in top left, dogs on bottom left, MSFT on top right and Tesla/Zoom on bottom right.
- there are 3 ways to values stocks: 1) net assets, 2) earning power, 3) growth value, the first one only becomes relevant in distressed situations where management destroyed earning power.
- BV needs adjustment: RE * 1.25, Equipement * 0.5, Intangibles: 3 year of SGA?, Options
- Growth value is intangible
- Franchise/Moat is required to preserve earning power
I put some notes on IB financial statement items to go beyond earnings, growth, management.
In Nov 2022, I reviewed Equity Valuation, models from investment banks edited by Jan Viebig et al. The book starts witha description of DCF models and various metrics, a MC model, followed by a discussion of EP (Enterprise Profit) or EVA approaches vs Holt CFROI.
The CFROI computes a IRR based on all cashflows that were invested into the business, using inflation adjustments to reflect the time value of money. This in theory requires the accounts of the company for all years as well as expected terminal values of investments. The measure inclues all cash paid in, so that idle cash and impaired goodwill will reduce the CFROI.
The EP measure is just a NOPAT/assets - wacc. Note that the tax rate applied is not real since interest charge is not applied, and there is a choice to make between NOPAT inclusive of depreciation divided by NetAssets vs NOPAT / Assets grossed up by all amortization.
The author remarks that EP does not include goodwill, so that the overpriced aquisition of 3G licenses does not bear on Vodafone EP, whereas it weighs on its CFROI.
Update April 2023
I reviewed the following books:
Update May 2023
Here is a link to CFA Financial Statement Analysis