Equity Valuation

Equities. Our investment methodology for equities is an extension of our fixed income analysis, where we view equities as the residual claim on a company’s assets following debt claims and other senior securities. As a result, the trading level of a company’s debt is relevant to establishing a required rate of return for its equity.


We use a dynamic model that incorporates the S&P 500’s earnings yield as it compares to investment grade bond yields. These broad market measures are compared to the fundamental earnings and free cash flow potential of the equities we analyze to establish investment horizon return potential. Finally, a stock’s historic valuation is relevant in establishing expected valuation ranges and our intrinsic value estimation.

Our equity analysis tools rely on the following, well-established financial theorems, all of which are incorporated in our analysis:

  • Firm value is consistent, despite changes of mix between equity and debt capitalization (Miller & Modigliani)
  • The capital asset pricing model (CAPM) can assist in estimating required equity returns based on expectations for the broader marker return and company systematic risk (beta)
  • Low market cap/low price-to-book stocks tend to outperform large cap/high price-to-book stocks even once adjusting for beta (Fama & French)
  • Companies that combine a high earnings yield (inverse of P/E) and high return on invested assets and tend to out perform (Greenblatt).