Cockpit Manual

Ticker Coloring (blue or green):

Tickers that appear in blue represent what we call “Core EVA Monsters.” These companies typically have an explosive growth runway over the next 5 years, but their decades-long future may be hard to judge since they typically operate in dynamically changing industries (like technology or digital payments). More importantly, they possess a fundamental return potential in the 12-15% region, so in general, we can purchase these stocks at or near their fair value and still enjoy outsized returns. (Please note that doesn’t mean that every blue ticker is an automatic buy at fair value.)

Tickers in green represent what we call “Longevity EVA Monsters.” They usually don’t have such a dynamic growth runway as “Core EVA Monsters,” but these stocks face no tectonic shifts in their respective industries, so we feel pretty confident about their decades-long growth potential, albeit at a slower pace. They possess a fundamental return potential in the 8-10% range; thus, we want to buy these stocks somewhat below their fair value so that the valuation expansion can boost the total return potential into our desired 12-15% region.

Daily Change:

This column shows the daily price changes of the given stocks. (Based on Google Finance’s data that may be delayed up to 20 minutes.)

Fair Value:

This value is calculated by employing an EVA-based discounted cash flow model. We use a 10-year explicit EVA growth period and come up with an enterprising and conservative scenario regarding the underlying growth assumptions. The fair value you see in the spreadsheet is the average of these two values.

Please bear in mind that coming up with a precise fair value is near impossible for a typical EVA Monster, where the magnitude and length of the explicit EVA growth period are immensely tough to judge, and these inputs can have a major impact on the calculated fair value.

We do not recommend making investment decisions solely based on this column; however, this can be really useful in extreme cases. When a stock is trading at several times this calculated fair value, it is hard to see why it would be an interesting investment candidate, while, for example,  a 50% discount to fair value can signal major mispricing, where the valuation component could act as a significant tailwind, besides the already healthy fundamental return.

Every time we get new quarterly data, these values might change meaningfully. Ideally, we would expect these fair values to grow over time as these EVA Monsters continue their profitable growth runway.

Price to Fair Value:

Here you can see the Fair Value divided by the current share price. For example, if this column reads 0.50, the stock is trading at a 50% discount to our estimated fair value.

5YR Target Price:

What you see here is our expectation of a realistic stock price 5 years from now, plus the gross amount of dividends expected to be paid out during this period. To get to this value, we make forecasts regarding all four aspects of the fundamental return formula.

The first is EVA growth during the period, where we employ the 5-year consensus EVA forecasts from Refinitiv. In case we have already done our deep-dive analysis, we usually modify the consensus forecast regarding sales growth and EVA Margins to better reflect our views about the company.

The second component is the entry dividend yield and any growth in these payouts over the next 5 years. The cumulative dollar value of dividends harvested in the period is added to the estimated stock price, so you can see the true total return potential that you could realize from the investment. For example, if the stock price 5 years from now is expected to be $100, and you could harvest $20 in dividends over this period, you will see $120 as the 5YR Target Price.

The third component is the effect of stock repurchases based on historical patterns and forward-looking management communication.

Next, we assign the stock a fair valuation range based on historical averages while also taking into account its quality and growth characteristics. Regarding the valuation range, we calculate an enterprising and a conservative scenario, where we differentiate the exit valuation component 5 years from now.

Finally, we use the average of these two stock prices as a basis for the 5YR Target Price.

When you see a price colored in red, that means that during the latest meaningful update, the 5YR Target price has decreased. For those in green, the 5YR Target price has increased. We only adjust these colorings when the price has changed meaningfully.

5YR Total Return Potential:

Here you can see the 5-year annualized total return potential of the stock from the current price.

12% Total Return:              

From this entry price, a 12% annualized total return seems realistic over the next 5 years, based on our expected 5YR Target Price.

15% Total Return:

From this entry price, a 15% annualized total return seems realistic over the next 5 years, based on our expected 5YR Target Price. We typically get truly interested in an EVA Monster company when its stock price falls below this threshold.

Punchcard Buy:

From this entry price, it is hard to foresee a scenario where we would not reap handsome returns, as we believe the risk/reward ratio is heavily skewed in our favor. Even if the stock were to trade at our “conservative” exit valuation 5 years from now, we still foresee a 15% total return potential from this level. In most cases, those EVA Monsters whose stock price falls below our punchcard entry levels are exceptional buying opportunities. (Please note, though, that this does not mean their share price cannot fall further.)

Model Last Updated:

This column marks the date of the latest model update. Whenever you see these cells in red, that means that either the last update happened more than 30 days ago or that the firm posted new quarterly results, which are not yet included in our model.

We aim to keep all models up to date, but please bear in mind that sometimes the EVA data lags the release of the quarterly report by up to one week.

Quantitative?:

For those stocks where you see the label “Quant.” in this column, we have not concluded our deep-dive analysis yet, which consists of  ~30 hours of reading, thinking, and digesting information. This means that there are far fewer qualitative considerations in those models, as opposed to those companies where we have done our due diligence (marked by a “-” sign). We still do our best to put these models together so that they reflect a realistic total return potential.

We aim to decrease the amount of “Quant.” models at a pace of 2-3 companies per month. Only once we perform a deep-dive research will you get to see the “Punchcard Buy” price level since we believe this extensive qualitative work is needed for us to be able to provide these no-brainer entry prices.

Now that you’re ready…

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