Anchoring Valuation of U.S. Stocks in a Fast-Changing Marketplace
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Relatively early in the financial crisis and before the most severe market dislocations were to occur, Federal Reserve Chairman Ben Bernanke was asked while speaking at a luncheon at the Economic Club of New York, what information he would find most useful in developing a strategy to navigate the financial crisis? He said “I’d like to know what those damn things are worth”, referring to the toxic assets and complex derivatives which were valued based on black box algorithms. Given the uncertainty and rapid change that have enveloped the equity markets over the past two years, the same could be safely said about the valuation of common stocks as well.
Because of the severity of the market dislocation, many of the “rules of thumb” or traditional relative valuation relationships that equity investors and traders learned to rely upon during more stable times became ineffective. The crisis triggered the rapid change––and at times substantial deterioration––in fundamentals of many companies. At the same time, the rewards and penalties the market afforded stocks for having different risk characteristics such as dividend payout, historical earnings stability and volatility changed briskly and materially. Co-integrated relationships evaporated and greater differentiation in valuation emerged even amongst traditional peers. In the investment community, we were all left scrambling to identify new more appropriate dynamic benchmarks to keep up with this fast evolving market and to learn from comparable historical situations to anchor our valuation analyses. A number of questions that seemed less important during the long bull run years became and continue to remain front and center in equity analysis:
- Given a company’s particular fundamental risk profile and earnings expectations, does its current price reflect more upside or downside potential if market conditions were to mean revert? How does the stock’s current price compare to the way stocks with a similar profile would have been valued over historical periods of time? During other recessions? Recoveries?
- Are the historical multiples of a particular stock still relevant? What factors have led to the change in its multiple from historical levels? How much was due to changes in market conditions which might be expected to mean revert over time, versus potentially more permanent changes in particular fundamental risk characteristics of the stock?
- The difference in P/E ratio between two peer companies used to be two multiple points and now it is four. What prompted that change––and is it actionable? Did their relative fundamental risk profiles change? Did the way the market is willing to reward and penalize the differences in their profiles change? Or both?
The Market TopographerTM Solution
OCE Interactive is introducing its flagship Market TopographerTM, a new Web-based platform for benchmarking and valuation analysis of U.S. stocks, that enables investors to address these types of questions across all market conditions when analyzing a stock’s valuation. The platform facilitates dynamic benchmarking which not only adapts to the changing market environment and company fundamentals, but quantifies the impact for you on a stock specific basis, helping you to profit from it.
With Market Topographer, you can evaluate objectively if a stock is consistently priced with other stocks both currently and across time, and whether or not risk is being properly priced. At the core of Market Topographer is a cross-sectional multi-factor model run nightly and backfilled for 20 years that quantifies how the market is willing to reward and penalize the valuation of companies having different defining fundamental risk characteristics such as dividend payout, growth expectations and earnings stability––twelve in total.
It combines fundamental and behavioral analysis, with a particularly strong focus on evaluating how a company’s risk profile impacts its relative valuation and whether or not the expectations embedded in a stock’s price are achievable. With Market Topographer you can benchmark and evaluate separately the three primary elements that drive a company’s valuation: its fundamentals, its longer term earnings and cash flow expectations, and the impact of market conditions (e.g. the way the market is rewarding and penalizing companies having a specific risk profile at any given point in time).
More specifically, Market Topographer offers users three complementary benchmarking techniques to gain a comprehensive perspective on the valuation of any given stock:
- Direct comparison of its fundamental risk profile and related valuation implications relative to other stocks currently and across time;
- Demonstration of how stocks with a similar risk profile and expectations would have been priced historically; and
- Assessment of the reasonableness of the expectations priced into the stock based on comparisons with the historical record of fundamental achievements of a broad selection of relevant companies over time.
In a market where company fundamentals and expectations, as well as the market’s attribution of rewards and penalties to companies for having different risk characteristics are so fluid, Market Topographer will provide fresh insights, perspective and confirmation of your ideas. It provides a framework to connect the dots between the valuations of companies, both currently and across time, and between the expectations priced into stocks and specific examples from the market’s record of historical fundamental achievements to support those expectations.
Today more than ever, successful investing entails learning from history, evaluating the present situation and developing an informed thesis about the future. Market Topographer maps the market, so you can discover value.TM
Try it for Free and See How it can Make a Difference
OCE Interactive is making the Web-based Market Topographer platform available to you free of charge for a limited time as part of its introduction. We invite you to try it at www.markettopographer.com. No credit card or commitments of any kind are required to gain access. Simply fill out the free basic online registration form and press the “Launch” button. Of course, we would greatly appreciate your feedback and expressions of interest.
Jonathan Greenberg, CFA, President, CEO and Chief Software Designer of OCE Interactive, has spent nearly 20 years on Wall Street. Prior to co-founding the predecessor of OCE Interactive in 2003, Greenberg spent the bulk of his career as an investment banker at Salomon Brothers and Lehman Brothers.
About OCE Interactive
OCE Interactive is the developer of Market Topographer™ (www.markettopographer.com), a new platform for benchmarking and valuation analysis of U.S. stocks. Market Topographer combines fundamental and behavioral analysis to help investors and advisors evaluate, in an objective and market-consistent way, whether a stock is reasonably priced, with a particularly strong focus on assessments of the company’s relative risk profile and whether the expectations embedded in its stock price are achievable. OCE was founded in 2003 by a team of former bulge-bracket investment bankers and Wall Street executives, who spent more than six years developing the Market Topographer platform. Currently, the company has six patents pending on its technology and an extensive pipeline of additional tools for equity valuation and mergers and acquisitions practitioners. The company is based in New York.
To get in touch with us, please send emails to email@example.com.
--Jonathan D. Greenberg, CFA