Framework for Stock Categorization and Investment Strategy PPT

This PPT slide, part of the 164-slide Valuation Training PowerPoint presentation, presents a framework for categorizing stocks based on their growth potential and return on invested capital (ROIC) relative to the weighted average cost of capital (WACC). It divides stocks into 4 quadrants: Power House, Cash Cows, Perennial Underachiever or Future Prospects, and Capital Killers.

In the Power House quadrant, stocks exhibit high industry growth and possess attributes like franchise value and pricing power. The text prompts a critical evaluation of the sustainability of these advantages, suggesting that while these stocks are attractive, their long-term viability must be assessed.

The Cash Cows quadrant features stocks with low industry growth, but strong cash generation. These stocks are characterized by their ability to provide returns to investors, often with low risk and a strong yield. The focus here is on the potential for diversification and the importance of maintaining a robust cash flow.

Moving to the Perennial Underachiever or Future Prospects quadrant, stocks here may appear expensive and are often burdened by a stretched balance sheet or restructuring efforts. The phrase “Throwing good money after bad” indicates caution, advising investors to be wary of continued investment without clear signs of recovery.

Lastly, the Capital Killers quadrant identifies stocks that may look cheap, but are often plagued by cyclical downturns or industry-specific challenges. The slide suggests a need to exit these positions, emphasizing the importance of understanding the underlying reasons for their poor performance.

Overall, this matrix serves as a strategic tool for evaluating stock investments, guiding decision-making based on growth potential and financial health.

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M&A (Mergers & Acquisitions) Valuation Sustainability Restructuring Restructuring