Valuation

1) Stocks

 

The key question for the analysis of the valuation of stocks is:

 

Is the value creation of a company reflected in the valuation ratios of the shares?

 

To answer this question, we calculate the following valuation ratios:


1. Price earnings ratio

2. Dividend yield

3. Price book value ratio

4. Enterprise value to turnover

 

We compare them to relevant reference figures (figures for the whole market, for similar companies (peer groups), for the sector or also own historical figures).

 

In addition, we calculate a so-called "fair value" under different assumptions on the basis of a DCF analysis (discounted cash flow) and compare the results to the market value of the company. In contrast to many other analysts, we do not use this method to determine concrete price targets. In our opinion, this does not make sense for long-term investors, because these targets are only valid for a short time-frame. Instead, we apply a DCF analysis to detect overvaluations or undervaluations as well as for scenario analyses, in which the development of a company is simulated under different circumstances.

 

To track down market inefficiencies, we monitor indicators for market divergences. In detail we evaluate the following indicators:

 

1. Trend analysis of revisions of earnings estimates and profit surprises

2. Technical analysis: relative strength of a security compared to a reference index

3. Insider's purchases and insider's sales of securities

 

 

2) Bonds

 

The valuation of bonds is assessed by asking the following questions:

 

To what extent are the risks of the specific bond investment reflected in the absolute yield and the risk premium compared to a government bond?

 

Hence, our main questions for the assessment of the valuation of a bond are:

 

1. How high is the actual nominal yield of a bond?

 

2. Does the yield advantage reflect a “fair” risk premium compared to a government bond (in basis points)? Our estimate of the default risk helps us determine this.