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Consilient Observer
September 15, 2020

One Job

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September 15, 2020

One Job

Consilient Observer

One Job

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September 15, 2020


Expectations and the Role of Intangible Investments

  • The one job of an equity investor is to take advantage of gaps between expectations, which reflect the free cash flows a company must deliver to justify today’s stock price, and fundamentals, which capture the actual results.
  • Understanding the return on investment helps with understanding a company’s future cash flows, but the challenge is that the mix of investment has shifted over time and is today more intangible than tangible.
  • We discuss three essential aspects related to the rise of intangible investments: how to measure them, their main characteristics, and the implications for investors.
  • An investor’s job has not changed but the analytical approach has.
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Free cash flow (FCF) is a measure of financial performance calculated as net operating profit after tax minus investment in growth. FCF represents the cash that a company is able generate after laying out the money required to maintain or expand its asset base.

The S&P 500® Index measures the performance of the large cap segment of the U.S. equities market, covering approximately 75% of the U.S. equities market. The Index includes 500 leading companies in leading industries of the U.S. economy.

Price-earnings (P/E) is the price of a stock divided by its earnings per share. Sometimes called the multiple, P/E gives investors an idea of how much they are paying for a company’s earning power. The higher the P/E, the more investors are paying, and therefore the more earnings growth they are expecting.

The cost of capital is the rate at which you discount future cash flows in order to determine the value today. The weighted average cost of capital blends the opportunity cost of the sources of capital, typically debt or equity, with the relative contribution of those sources.

Return on investment is a performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments.

Net present value is a measure of the value of estimated future cash flows discounted back to the present.

The discount rate is the rate at which you discount future cash flows in order to determine the value today.

The price-to-book multiple or ratio (Price/Book) compares a stock’s market value to the book value per share of total assets less total liabilities. This number is used to judge whether a stock is undervalued or overvalued.

The Russell 3000® Index measures the performance of the largest 3,000 U.S. companies representing approximately 98% of the investable U.S. equity market. The Russell 3000 Index is constructed to provide a comprehensive, unbiased and stable barometer of the broad market and is completely reconstituted annually to ensure new and growing equities are reflected.

The residual, or terminal, value is the value of all future cash flows at the point of time in which growth is expected to become stable.

Return on invested capital represents the rate of return a company makes on the cash it invests in its business.


The views and opinions are those of the author as of the date of publication and are subject to change at any time due to market or economic conditions and may not necessarily come to pass. The views expressed do not reflect the opinions of all investment personnel at Morgan Stanley Investment Management (MSIM) and its subsidiaries and affiliates (collectively the Firm”), and may not be reflected in all the strategies and products that the Firm offers.

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This material is a general communication, which is not impartial, is for informational and educational purposes only, not a recommendation to purchase or sell specific securities, or to adopt any particular investment strategy. Information does not address financial objectives, situation or specific needs of individual investors. 

Any charts and graphs provided are for illustrative purposes only. Any performance quoted represents past performance. Past performance does not guarantee future results. All investments involve risks, including the possible loss of principal.

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