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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.