A Few of the Criteria for Value Analysis

Karpas Strategies employs a bottom-up, company-by-company, investment process, which includes fundamental value analysis to determine a company's intrinsic value. There are a number of ways we determine intrinsic value, but in most cases we use the following as our key criteria for screening and selecting investments:

Low Price to Free Cash Flow

Free cash flow represents earnings before interest expense, income taxes, depreciation and amortization, minority interests, equity in earnings of affiliates, dividends on preferred stock, and other income items less capital expenditures.

This is a good measure of a company's ability to fund current operations and to service debt. Stocks selling at low prices in relation to free cash flow, especially in relation to other companies in the same industry, are frequently undervalued relative to the price that shareholders would receive if the company were sold.

Low Price to Book Value

We attempt to purchase companies at stock prices less than their book value (or well below industry levels) under the assumption that, in time, their stock price will reflect their book value, i.e., what the company itself has paid for its own assets.

Low Price to Earnings

Low price to earnings ratios support higher earning's yields than stocks bought at higher ratios of price to earnings. Earning's yield is the yield that shareholders would receive if all earnings were paid out as dividends.  Because growth is a variable in determining value, we prefer companies with a low price in relation to earnings that have excellent growth potential.

Management with Significant Ownership Stake and Compensation Tied Directly to Shareholder Value

Significant ownership by officers and directors shows that not only their reputation, but their wealth is on the line when making business decisions.

A portfolio containing companies that meet these criteria will be priced in total at a substantial discount to intrinsic value. In addition, we have found that meeting these criteria provides portfolios with a balance that minimizes risk and maintains opportunities for long-term growth.


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