If the CAPM is flawed, what can replace it? The best approach would be to assess whether companies in general and relatively speaking, the company in question, can raise money cheaply in public offerings.
Some companies are in the seemingly fortunate position that they can maintain profit margins simply by raising prices
Growth benefits investors only when the business in point can invest at incremental returns that are enticing
Asking ourselves questions in a simple framework based on Michael Porter’s five competitive forces allows us to understand what makes Warren Buffett’s moats work and where they are likely to break down.
Management that unfailingly thinks and behaves like an owner of the business and has the courage and candor to discuss failures openly in reports to shareholders.
From its growing operating cash flow, it is able to fund growing capital spending and also fund growing R&D expenditures. Of note, it seems to be able to maintain and even improve its operating margins. It is easily able to fund the capex needed to maintain it long-term competitive position in its various markets. It is also easily able to fund the capex it chooses to make to grow the company and fund healthy R&D expenditures.
The question then becomes whether the market is simply slow to recognize the value in the company or whether the analyst was too optimistic in their estimate of fair value.
A careful selection of a few investments (or a few types of investment) having regard to their cheapness in relation to their probable actual and potential intrinsic value over a period of years ahead and in relation to alternative investments at the time.
Declining free cash flow may be a sign the company is investing for the future! Or it may be a very bad sign. Increasing free cash flow may be a good sign or a bad sign. It’s all in the interpretation of the financials.
We are looking for opportunities and we don’t much care what category they’re in
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