Executive Summary:

  • Applied Finance produces robust intrinsic value estimates to capture changing relationships between market prices and firm value.  A valuation gap refers to notable differences in the valuation-based characteristics observed on large baskets of stocks.
  • A significant valuation gap has formed between “high risk” and “low risk” equities.  “Low risk” stocks currently trade at historic premiums last observed at the peak of the tech bubble.
  • Previous seasons with similar valuation gap characteristics have been followed by significant outperformance of “high risk” stocks, while “low risk” stocks and passive alternatives lagged due to high levels of correlation between each investment approach.
  • Investors should consider strategic allocation that seeks out valuation-based active management.

After so many years of false starts, dramatic reversals, and frustrating disappointments, so-called Goldbugs and Silverbugs such as myself are now finally being rewarded for their saint-like patience, thanks to the Fed and global central banks.