By Brian Nelson, CFA
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At Valuentum, we like to look at companies from a number of different perspectives. The Valuentum Buying Index (VBI) combines rigorous financial and valuation analysis with an evaluation of a stock’s technicals to derive a rating between 1 and 10 for each company. The VBI places considerable emphasis on a company’s discounted cash-flow (DCF) valuation, its relative (behavioral) valuation versus peers (both forward PE and PEG ratios), and its technicals in order to help readers assess entry and exit points on the most interesting ideas.
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Let’s follow the red line on the flow chart above to see how a company can score a 10, the best mark on the index (a “Top Pick”). First, the company would need to be ‘UNDERVALUED’ on a DCF basis and ‘ATTRACTIVE’ on a relative (behavioral) value basis. The stock would also have to be exhibiting ‘BULLISH’ technicals. The firm would need a ValueCreation rating of ‘GOOD’ or ‘EXCELLENT’, exhibit ‘HIGH’ or ‘AGGRESSIVE’ growth prospects, and generate at least a ‘MEDIUM’ or ‘NEUTRAL’ assessment for cash flow generation, financial leverage, and relative price strength.
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This is a tall order for any company, and why a rating of a 10 on the VBI is so rare! Stocks that don’t make the cut for a 10 are ranked accordingly, with the least attractive stocks, in our opinion, garnering a rating of 1 (“We’d sell”). Most of our coverage universe registers ratings between 3 and 7, but at any given time there could be a large number of companies garnering either very high or very low scores, especially at market lows or tops, respectively. The simulated Best Ideas Newsletter portfolio shows how we put the VBI into practice within a portfolio context.
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So which stock just registered a perfect 10?
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In our 16-page equity research reports, we offer a fair value estimate for each company based on a rigorous and transparent discounted cash flow process, assess the attractiveness of a stock based on a firm-specific margin of safety, and provide a relative valuation comparison in the context of the company’s industry and peers. Each report includes detailed pro forma financial statements, explicit fundamental forecasts, and scenario analysis. A cross section of the ValueCreation and ValueRisk ratings provides a financial assessment of a company’s business quality (competitive position), while the ValueTrend and Economic Castle ratings offer insight into the trajectory of a firm’s economic profit creation (ROIC versus WACC). Included in each 16-page report is a company’s rating on the Valuentum Buying Index (VBI), a methodology that combines rigorous financial and valuation analysis with an evaluation of a firm’s technicals and momentum indicators to derive a score between 1 and 10 for each company (10=best). We believe the VBI methodology helps identify the most attractive stocks at the best time to consider buying, helping to avoid value traps and lagging performance due to the opportunity cost of holding a stock with great potential but at an inopportune time. The Best Ideas Newsletter portfolio puts the VBI into practice. Read more about the Valuentum Buying Index rating system, “Value and Momentum Within Stocks, Too.” Members can access our 16-page company research reports, generally updated on a quarterly basis by using our ‘Symbol’ search box in our website header.
