Tuesday, 27. June 2017  

Getting Started

Welcome to ValueExplorer.com's "Getting Started". Here you can learn all about our fundamental methods to estimate intrinsic stock values and to improve timing and style selection decisions. This section of our site is continually growing as we add more and more articles and information so check back often and send us your feedback so we can make Getting Started even better.

Why ValueExplorer.com?

At the center of ValueExplorer.com is an Automated Valuation Model (AVM) tool that generates a fundamental estimate of stock value in seconds. ValueExplorer.com helps you to make Faster, Smarter, Better stock market decisions for better profits. With ValueExplorer.com you don’t have to spend hours trying to pick the right stocks.

What is Value Investing?

Value investing is an approach that seeks attractive risk-adjusted returns by investing in stocks trading at significant discounts to their intrinsic value. Value investing utilizes fundamental bottom-up security analysis to identify businesses available at steeply discounted prices with a "margin of safety", - the difference between a stock's market price and its intrinsic value, built into the price of the stock. This disciplined investment approach seeks to deliver attractive long-term returns with relatively low volatility.

What is the Intrinsic Value of a Stock?

The Intrinsic Value of a Stock is the fair value of a firm separate from its market value or share price. The fair value of a company varies by the assumptions made to the financial prospects of the underlying business. There is no one intrinsic value for a stock at any given time, rather it is based on an underlying perception of its true value including all aspects of the business, in terms tangible and intangible factors, quantitative factors (capital, earnings, revenue) and qualitative factors (management quality, intellectual capital, past record). Investors use a variety of analytical techniques in order to estimate the intrinsic value of securities in hopes of finding investments where the true value of the investment exceeds its current market value. However, there are many ways to do this, and virtually all methods of calculating intrinsic value involve making predictions that may not be correct or are influenced by unexpected factors.

What is the Margin Of Safety of a Stock?

The estimated intrinsic stock value of a firm may be lower or higher than its market value, indicating that the firm is undervalued or overvalued. An investor's required Margin Of Safety, which is a measure of risk equal to the amount by which a stock's price is below its intrinsic value, determines what stock price is attractive to that investor. For example, if the investor's required margin of safety is 70%, the investor would only consider purchasing a given stock if it traded at a discount to its intrinsic value of at least 70% or less.

What is ValueExplorer.com all about?

“When we designed this system we did not have time to look through thousands of financial statement reports manually. We needed answers fast, no opinions, no guesswork and that’s why we created Valueexplorer.com”

    Nic Wright

The ValueExplorer.com tool provides fundamental stock value estimates based upon exhaustive and homogeneous quantitative procedures. For doing so, ValueExplorer.com has developed a unique proprietary automated stock valuation model, based upon the most trusted principles of value investing. The same methodologies are applied to all companies equally in a consistent and traceable process.

How does the AVM’s 3-pronged approach work?

The ValueExplorer.com AVM simplifies the stock valuation process by employing the most trusted methods of value investing based on Graham & Dodd and Joel Greenblatt to calculate the intrinsic value of stock. Both the Graham & Dodd and the Greenblatt method are based on the Income Approach to Business Valuation. The AVM also provides a third valuation method, the Mean Multiple Value approach, which is based on the Market Approach to Business Valuation.

ValueExplorer.com's Automated Valuation Model employs three distinct methods to estimate the fair value of a given stock:

  1. Mean Multiple Value: fair stock value based on the long-term historical average stock valuation multiples.
  2. Graham Intrinsic Value: fair stock value based on capitalized long-term historical average earnings, aka Intrinsic Stock Value.
  3. Greenblatt Fair Value: fair stock value based on capitalized sustainable historical trend earnings.


The Graham model assumes that profits will revert to their historical mean over the cycle, while the Greenblatt model assumes that profits will broadly follow their sustainable trend.

Growing and declining businesses: Deviations between Graham Intrinsic Value and Greenblatt Fair Value arise when the earnings of a given company are on a long-term upward trend, i.e. growing, and when they are on a long-term downward trend, i.e. declining:

  1. Growing business: Greenblatt Value Upside greater than Graham Value Upside indicates that a company is growing.
  2. Declining business: Greenblatt Value Upside less than Graham Value Upside indicates that a company is in decline.

Going-concern: Fair value estimates are based on the going-concern principle, which is a basic concept in accounting that assumes a company will continue to operate in the foreseeable future. The significance of this concept becomes apparent when the value of a running business is compared with the value of one being liquidated.

Warning signs of companies in decline: Caution is warranted on companies with declining long-term revenues or profitability trends and stocks with unusually high fair value upside as the going-concern principle might be impaired. In order to judge a fair value estimate we recommend paying particular attention to what is going on within the company.

The AVM is available to users of ValueExplorer.com’s Analyzer, Modeler, and Screener:

The Fundamental Value Analyzer is an “easy” to use business valuation tool combining simplicity with the most rigorous scientific approach. The Automated Stock Valuation Model (AVM) provides intrinsic stock value estimates and traditional valuation ratios. The AVM's Intrinsic Value Estimates are based on the approaches of Graham & Dodd and Joel Greenblatt, analyzing long-term financial statement data.

Analyzer Example Report (click to enlarge screenshot):

The Fundamental Value Modeler is a business forecasting environment and stock valuation tool combining the simplicity of the ANALYZER tool with interactivity. Users can load a firm in the forecasting environment, edit and save a forecast model and open a previously saved personal forecast model.

Modeler Example Report (click to enlarge screenshot):

The Fundamental Stock Screener is a tool to search stocks worldwide by upside to fair value, country, industry, size, volatility, netdebt/ebitda, earnings and sales growth, dividend yield, ev/sales and ev/ebitda, price/book, price/earnings, price momentum and more. Upside to fair value, also known as margin-of-safety, is based on the AVM’s intrinsic value estimates. Users can create own screens or choose the preset Greenblatt Value and Graham Value stock screens.


How can the IRM Economic Activity Index help with timing and style decisions?

“History doesn't repeat itself, but it does rhyme,” wrote Mark Twain. His words apply to investing, where profits and returns come from cycles. Hence the most basic axiom of investing, “buy low and sell high”, can and should be put in context.

Two things determine “high” and “low”:

One is fair stock value: an investor must be able to discount cash flows with some certainty, and compare this to prices.

The other one is cycles: investors should know in which phase of the business cycle the economy currently is, because intrinsic values depend on earnings, which are a product of the economic environment.

Below we lay out the case for business cycle investing and describe our method and its output.

The IRM Economic Activity Index is designed for timing the stock market. Market timing strategies in general attempt to predict future market price movements, but there are major differences between the way these predictions are being made. Usually the outlook of market conditions is derived from either technical or fundamental analysis. While there are many arguments against stock market timing, we belief that the stock market cannot escape the fundamental laws of economics and that the pace of economic activity is decisive for the stock market's direction and the prefered equity style (small vs. large, cyclical vs. conservative stocks). Therefore we designed a leading economic activity index that reflects the fundamental prospects of investing in the stock market in general and helps with equity style decisions.

Background Information

The National Bureau of Economic Research (NBER) Business Cycle Dating Committee maintains a chronology of the U.S. business cycle since 1929. Contrary to popular belief the NBER does not define a recession in terms of two consecutive quarters of decline in real GDP. Rather, a recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.

Assuming GDP is measured accurately, it’s probably the single most conclusive piece of information on the health of an economy. The problem with NBER's recession dating is the time lag between business cycle turning points and the announcement by the dating committee that a recession (or an expansion) began at a certain date. The longest delay between the beginning of a new phase of the business cycle and its announcement was 21 months after the recession ended in March 1991. The shortest delay was five months after the expansion ended in January 1980.

Why rising GDP data does not rule out a recession? GDP is calculated by the Bureau of Economic Analysis (BEA). The BEA revises GDP several times as more and better component data become available. Still, because of the tremendous size and complexity of the U.S. economy, it can be very difficult to know where we are on the expansion/recession continuum. In practice GDP data releases often don't show GDP turning negative until about half a year after the recession has actually begun - that's typically been the case in the past recessions: It took more than a year to learn that GDP actually shrank by 1.3% during the first quarter of the 2001 recession. But back then, it was initially reported as having grown at 2.0%.

In August 2008 just before the Lehman collapse GDP was reported to have risen in the first and second quarters with the latter revised up sharply, triggering over a 200-point rally in the Dow that day. Today we know that GDP actually shrank in the first quarter while the second has been revised down by two full percentage points.

How can fundamental analysis help timing the market? Stock markets are driven by growth expectations. To grasp what a prudent financial investor can expect from the stock market we closely monitor the pace of economic activity by looking across major economic leading indicators and all major asset classes, except equities which we ultimately want to predict.

Description of the IRM Economic Activity Index

The IRM Economic Activity Index is a daily measure of the U.S. economic activity and combines economic leading indicator data with financial market data from various asset classes into a normalized index. The values of this index are z-scores, which represent the number of standard deviations that current conditions lie above or below the average of a rolling 5 year period. IRM index levels above zero stand for economic expansion and levels below zero stand for economic contraction.

While there is no such thing as a "magic" stock market forecasting model that works perfectly well all the time, the IRM Index based stock market timing model has a historical track record of signaling economic turning points well in advance of traditional market timing indicators and often one to four weeks ahead of turning points in the stock market. The stock market timing model not only was bearish at the stock market top in 2007 but was also screaming “buy” at the bottom in March 2009. The IRM Economic Activity Index is published daily on the front page of our web site.




IMPORTANT INFORMATION: This information has been prepared solely for information purposes and is not an advice to buy or sell or a solicitation of an offer to buy or sell any security or instrument or to participate in any particular trading strategy. This information is based on or derived from information generally available to the public from sources believed to be reliable. No representation or warranty can be given with respect to the accuracy or completeness of the information. We do not undertake to update this information. Certain assumptions may have been made in the analysis that resulted in any information and returns/results detailed herein. No representation is made that any results/returns indicated would be achieved or that all assumptions in achieving these returns have been considered or stated. Changes to the assumptions may have a material impact on any results/returns detailed. ValueExplorer.com disclaim any and all liability relating to this information, including without limitation any express or implied representations or warranties for statements contained in, and omissions from, this information. Past performance and, where applicable, simulations and forecasts are no reliable indicators of future results. Price and availability are subject to change without notice. ValueExplorer.com does not give investment, tax, accounting and legal or regulatory advice and prospective investors should consult with their professional advisors. This communication is a marketing communication. It should not be regarded as an investment research recommendation and has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Unless stated otherwise, the material contained herein has not been based on a consideration of any individual client circumstances and as such should not be considered to be a personal investment recommendation. Investors should obtain individual financial advice based on their own particular circumstances before making an investment decision based on the information provided from using this site. Unless stated otherwise, ValueExplorer.com or its staff has no positions in any stocks mentioned, and no plans to initiate any positions, and does not and will not receive direct or indirect compensation for mentioning a security. The names of individuals appearing on this site are for identification purposes of the methodology only and are not intended to suggest or imply any affiliation with or endorsement or even agreement with this report personally by such persons, or any knowledge or approval by such persons of the content of this report. All trademarks, service marks and tradenames appearing in this report are the property of their respective owners, and are likewise used for identification purposes only (legal disclaimer).