Emotional Unease Creates Generational Wealth Opportunity

The stock market today is trading at valuation levels last seen in 2008, before an unprecedented wealth creation bull market swept away the fear of the Great Recession. Then as now, it’s always about the expectations built into market prices.

In 2000, our firm issued a report saying Cisco was worth $18 per share, when it was trading at $80 and was one of the largest market capitalization firms in the world. The response to that report was succinctly summarized by an email reply that simply said- “You guys are idiots.” In fairness, he could have been right for many other reasons, but not on our estimate of Cisco’s value!

Every stock price has embedded a set of future performance goals a company must meet to justify its price. In 2000, the expectations embedded in Cisco’s price were unachievable, and subsequently its price dropped from $80 to our $18 estimated value, around which it stayed for years.

Since 1998, Applied Finance has calculated weekly intrinsic value estimates for virtually every publicly traded US company using our Economic Margin® framework. Each intrinsic value estimate incorporates forward looking estimates of cash flow, investment growth, competition, and risk. The end result is an estimate of a firm’s value which we compare to its traded price. The validity of our approach is transparent as we publish our intrinsic values on 20,000 companies weekly. Scoring our work from 1998 through 2019 reveals that buying a basket of our most undervalued companies significantly outperforms a basket of those that we identify as most overvalued. As displayed in Chart 1, the annual difference is approximately 680 basis points a year, enabling our Valuation 50 and Valuation Dividend strategies to be ranked by Zephyr in the top 5% of their respective categories since inception.

Chart 1