DIFFERENTIATED THINKING

Generating alpha requires differentiated thinking

Successful stock selection requires a grasp of the outlook for incremental shareholder value creation, and not just absolute profitability measures. Daunting knowledge gaps can also arise due the challenges of articulating critical factors such as competitive advantage and risk into the stock selection process.

Rooted in an “economic” approach, our calculation of incremental economic value added measures incremental shareholder value creation – a key driver of equity valuations. As a credible leading indicator of earnings growth it lies at the heart of our framework, and allows us to unearth investment anomalies that the standard earnings based approach cannot.
Additionally, we enumerate many hard-to-pin-down, subjective, qualitative factors that are critical to the investment evaluation process. By computing the competitive advantage enjoyed by a company, codifying management capital allocation strategies and by unraveling risks in equities into three parts, we bring more coherence and objectivity to a stock selection process.
Our reports deliver unique institutional-grade insights.

FRAMEWORK

A framework that can give you an information edge

Our investment framework is a structured and numerically based process for investment evaluation. Proprietary metrics give investors – whether long, short, income, contrarian, growth or value – unique institutional grade insights to help generate alpha.

The framework is built around four pillars each of which constructed using proprietary, forward-looking metrics.

We codify key management strategy and capital allocation decisions – the ultimate source of value creation (or destruction).

Our forecasts for incremental economic value added (I-EVA) indicates which stocks are likely to enjoy solid valuation multiples.

Can profitability be sustained? Our calculation of implied competitive advantage (I-CAP) calibrates the implied duration of sustainability.

Risk and reward are two sides of the same coin, and we flip metrics on upside to understand risks in a stock. And we take a stab at embedded expectations – what of the outlook is priced-in to a stock already?

Incremental Economic Value Added

The outlook for incremental value creation (I-EVA) is the key driver of valuations

Competitive
Advantage

Management capital allocation decisions are the sources of value creation (or destruction)

Capital
Allocation

Competitive advantage shows the expected duration, strength of the forecast profitability.

Managing
Risks

Risk and reward are two sides of the same coin. We elaborate three indicators of risks

PRODUCTS

Powerfully simple products

Gaining insights need not be a painful exercise. Our reports help investors focus on what matters, and less time on large reports and spreadsheets. They have a powerful simplicity that makes equity analysis into a routine experience.

We have combined decades of human experience with advanced database analytics and visualization technologies to help you get quickly to the information and insights that you need. We think that it is important to give you information and insights – not just data. Every table is presented not as a riddle of numbers but as information, by giving it meaning through labels such as high, low, strong or weak. This places each stock in a clear position, based on percentiles, relative to its peers so that comparisons and insights can be drawn effortlessly. The alternative is verbose text!

You will find intriguing, essential insights that will augment your own body of research, empowering you to make the most well-informed investment analysis and decisions.

Growth
Style Ideas

The outlook for incremental value creation (I-EVA) is the key driver of valuations

Value Style
Ideas

Management capital allocation decisions are the sources of value creation (or destruction)

Income
Ideas

Competitive advantage shows the expected duration, strength of the forecast profitability.

Managing
Risks

Risk and reward are two sides of the same coin. We elaborate three indicators of risks

UNIQUE INSIGHTS

No amount of evidence will ever be good enough to give total confidence in stock selection

More information does not guarantee better investment decisions. Hence, it is important to focus of what is important, allowing room for some differentiated and unconventional thinking.

Successful investors adopt a critical and analytical approach when researching stocks, looking at a wide range of data points, considering multiple perspectives, while also questioning assumptions. And there can be significant informational advantage by piecing together small bits of information from various sources to build a comprehensive and nuanced view of a company

However, analysis of ever wider swathes of information does not guarantee superior results and can foster an illusion of knowledge. Hence it is important to focus on what really is important in stock selection. We hope that our framework will help investors unfreeze thinking with new perspectives, challenge preconceptions and give surprising insights.

Capital allocation decisions, such as expanding or contracting the invested capital base, through reinvestments, capital expenditure or R&D are the sources of value creation (or destruction).

We identify companies use an expansionary/aggressive, playing-to-win, approach and those using a contractionary/defensive, playing-to-not-lose approach. Either approach can be value creating (or destroying), and I-EVA trends are a litmus test.

Investors can ask important questions about the impact of capital allocation policies, such as, for example:

  • Will recent changes in policy help management engineer a turnaround in value creation, as our I-EVA forecasts appears to suggest?
  • Is shareholder’s capital being deployed on wasteful projects, as a deteriorating I-EVA forecast implies?
  • What is the risk to balance sheet due to a mis-allocation of capital?
  • Is the capital allocation strategy driven by M&A or is it an organic approach?
  • How important is the return of capital to shareholders?
  • How does the company’s capital allocation strategy compare to its peers?

The outlook for incremental shareholder value creation (I-EVA) is a key driver of equity valuations. I-EVA is an objective measure of management’s success in delivering incremental returns on each dollar invested in the business.

  • I-EVA is a better “predictor” of the variability in valuations than EPS. Indeed, I-EVA can be seen as a leading indicator of future earnings.
  • I-EVA offers better picture of underlying economic performance – not just successful in hitting soft and vulnerable metrics such as EPS.
  • We identify the stocks that are likely to show the strongest (weakest) incremental shareholder value creation trends.
  • Investors can short list stocks based on forecast I-EVA trends to sift those that appear to be on the cusp of value creation (or destruction)
  • I-EVA helps relative stocks selection, across companies and sectors (or even geographies), a more reliable exercise, not distorted by accounting distortions as I-EVA calculations are based on the rate of change in “economic” profit vs. invested capital base.

Risk and reward are two sides of the same coin. We identify three risks in stock selection: due to poor management execution; due to duration risk; and, due to excessive expectations.

Our metrics on reinvestment rates, implied competitive advantage, and in particular, our estimates of invested capital deployment measure the degree to which management may be willing to stretch the balance sheet to implement its strategy.

  • Capital allocation decisions present risks if management execution goes wrong and end up destroying shareholder value. We identify those companies pursuing aggressive policies without the promise of a proportionate I-EVA return potential.
  • Long periods of sustainable competitive advantage may be factored into the valuations of growth stocks, and this can give rise to valuation or duration risk. Our calculation of I-CAP (implied competitive advantage) helps investors separate the high risk from the low risk
  • Our proprietary estimate of embedded expectations captures the margin-of-safety in a stock which can highlight stock price bubbles or the stocks trading on distressed valuations.
  • Investors can assess whether an aggressive invested capital expansion and a poor I-EVA outlook pose risks to future dividend payments due to a potentially weaker balance sheet or risks to future cash flow generation

I-EVA metric can be an integral part of an investing strategy that focuses on income. It is an indicator of whether management is indeed laying strong foundations for a sustainable dividend policy.

Are long-term dividend returns sticky and assured, or is a negative dividend announcement may be just around the corner?

Does an aggressive capital allocation, alongside a stretched balance sheet, when combined with a poor I-EVA outlook pose risks to future dividends.

A poor implied competitive advantage trend may portend weakness for dividend into the future.

Our proprietary calculation of implied competitive advantage, (I-CAP) calibrates the the length of competitive advantage enjoyed by each company.

I-CAP indicates the future value component of a stock’s valuation – the “option” component; which indicates the magnitude of the potential upside to returns.

I-EVA and I-CAP metrics combined represents the essence of long equity investing – high profitability, sustained into the future. Or shorting, if the two trends reverse.

Are the trends in I-EVA underpinned by sustainable competitive advantage? Or, is the competitive advantage enjoyed by a firm set to go into decline?

I-CAP allow investors to make a relative call in stock selection through refining risk:reward trade-offs.

WHO WE SERVE

And how we serve investors

By establishing whether incremental value creation is set to expand we present where rewards lie in stock selection. Through an analysis of reinvestment rates, invested capital, competitive advantage and share price momentum we present a detailed picture of risks.

Whether long, short, income, contrarian, growth or value our institutional grade insights helps generate alpha. For instance, some growth investors may find
stocks where management has pursued an aggressive expansion strategy, showing promise strong I-EVA momentum, and long I-CAP values attractive.
Others may find the very same stocks to be compelling short ideas if the data points on risk are at inflated levels.

Value investors may seek stocks with
conservative risk profiles, and may see strong signs of turnaround in I-EVA momentum as an indication of value opportunity. Income investors may seek
assurance in strong I-EVA trends supporting dividends while our metrics on risk suggesting low risks to the balance sheet.

Sophisticated individual investors

Portfolio
Managers

Financial Advisors and Brokers

Hedge
Funds

Investment
Banks

Private
Equity

Private Wealth
Management

Family
Offices

INVESTOR TESTIMONIALS

Registered Investment Adviser
New York

You extensive coverage and unusual perspectives gives me confidence that I am fulfilling my fiduciary duties

Registered Investment Adviser
Chicago

I like your distinct approach. It makes my own presentations to clients distinctive and interesting.

Hedge Fund manager
New York

Interesting ideas from a different slant to feed into our long/short equity research base.

Private Wealth Manager
Austin, Texas

We manage our clients’ assets with the same diligence and care as our own business. Your research gives us a thoroughness to help do that.

Hedge Fund Manager, Long/Short
New York

Breadth of coverage is quite important for us, you have a very unique angle (it does look different).

Portfolio Manager, Pension Fund
London, England

Your research approach chimes with mine as I too use economic value creation as one of my main investment criteria.

Senior Portfolio Manager, Co-Head of Equities
Paris, France

Your approach seems very interesting and helpful especially for long term investors like us.

Portfolio Manager, Institutional
New York

I’m a margin of safety investor so was interested in your approach. I believe high ROIC is systematically under-priced and high I-EVA gives the stock plenty of leverage.

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