For some investors, investing in “factors” seemed to offer a cleaner way to generate returns, without the messiness of worrying about individual stocks and their idiosyncratic behavior. These investors, however should not lose site of the fact that they are actually investing businesses, not factors. In this paper, we explore how 2023 highlighted the limitations of focusing on factors rather than businesses.                        

Does a stock’s price and its P/E ratio tell you how much a company is worth? Conventional wisdom says yes, but we think otherwise. This paper explores the theory behind the discounted cash flow (DCF) valuation model and the underappreciated role played by ROIC. In addition, we see how the DCF model can be used to deconstruct P/E ratios in the real world.

In this second part of our two-part series, we demonstrate that deglobalization implies trend increases in capex and the labor share, as well as a higher weighted average cost of capital (WACC). This constitutes a secular headwind for margins and free cash flow (FCF), especially for tech and manufacturing. With companies facing greater macro volatility and an elevated WACC, we expect lower average multiples. This will prove especially challenging for longer duration assets, such as venture capital and speculative tech companies that are years away from generating FCF on a sustainable basis.

Global supply chains are being overhauled to reduce vulnerabilities and to restrict Chinese imports of “dual-use” products that can be used for both commercial and military purposes. In Part I of this two part series we show why the initial focus is on semiconductors and energy, and where it might go from there (AI, quantum computing, and other advanced tech). We also demonstrate the challenges for Chinese equities and U.S.-based multinational corporations, which have been the two biggest beneficiaries of globalization.

In this second part of our two-part series, we demonstrate that deglobalization implies trend increases in capex and the labor share, as well as a higher weighted average cost of capital (WACC). This constitutes a secular headwind for margins and free cash flow (FCF), especially for tech and manufacturing. With companies facing greater macro volatility and an elevated WACC, we expect lower average multiples. This will prove especially challenging for longer duration assets, such as venture capital and speculative tech companies that are years away from generating FCF on a sustainable basis.

We look at the importance of understanding how company management is compensated when analyzing a stock, particularly as it relates to the Quality Capital Reinvestment Strategies.