Strategic P/E Modeling
In the early 1960s, academic research documented that most
companies change their growth pattern within relatively short time periods -
only a few years. Subsequent studies have verified this initial conclusion.
Secondly, in the early 1970s, major research was done to show that historic
beta, that is beta calculated using trailing 60-month returns, had very little
predictive value. Again, this work has been verified many times since.
Interestingly, the Capital Asset Pricing Model, which is heavily tied to beta,
has not worked. However, breakthrough research in the early 1970s showed that
the factors that caused variance, or beta, change little over time. Hence, a
company can be modeled on a pro forma basis to determine its future beta vs.
its historic beta. DeMarche also uses the same dynamic model to estimate future
Using its proprietary factor model research,
DeMarche uses this concept to create a strategic pro forma for the company and
look into its future. By studying the relationships among, we can estimate the
characteristics of the future company and its relative performance.
Importantly, DeMarche can identify if a stock's clone group will change and
whether or not the nature of its institutional shareholders will change. Also,
through DeMarche's migration analysis, we can track how a company has been
growing its business, while managing its risk through time. Using specific
strategic planning information, migration analysis can be deployed to estimate
how well the company should progress relative to its peers.
THE NEXT STEP:
Assuming that the company's strategic plan is accurate, our
Strategic Manager Targeting service can predict for a company when its
value managers will be "selling" and when its growth managers will be buying.