OV Tool - Notes on Analytic Method
Electronic Data Feed
OV Metrics is powered by a daily-delivered electronic data feed from EDGAR Online, Inc. Stock prices are based on the 4:00 EST stock market close. Company sales, earnings, and cash flow are based on the most recently reported trailing-twelve-month's results, and book value is as of the most recent quarterly reporting date. Financial data is formatted in eXtensible Business Reporting Language ("XBRL") and represent "as-reported" financial results filed with the U. S. Securities and Exchange Commission. Users may edit certain of the OV data fields if there are events or financial results that cause feed data to be insufficient for their analytic purposes.
OV Metrics
OV Metrics is a set of common stock portfolio valuation measurements based upon the actual % owned of each company in the portfolio. By calculating the portfolio's ownership interests in each of the common stocks held, the owner is then able to better understand the underlying financial results supporting the portfolio's total market valuation. The OV Tool calculates the portfolio's actual ownership intereest in each company's sales, earnings, cash flow, and book value. then, by adding up all of the portfolio companies' ownership interests in the four areas of sales, earnings, cash flow and book, the OV Tool derives valuation ratios for the portfolio. In addition, the OV Tool displays the ownership interests in each company's results as a percentage of the portfolio's total ownership interests, thereby providing comparative data for further research and evaluation. In many cases the company's portfolio weights are far different than their respective % of the portfolio's total ownership interests in sales, earnings, cash flow, and book value. The OV Tool helps to quantify those valuation risk and exposure levels as well as to reveal holdings with relatively attractive valuations. As a result, the OV Tool helps in the asset allocation process.
OV Screening Modes
The OV Tool allows users to screen out certain companies from portfolio displays as follows:
Mode I - All portfolio holdings included, even those companies with huge operating losses and likely to have a skewing effect on the portfolio's valuation ratios
ModeII- All profit-reporting companies and loss-reporting companies, provided that the portfolio's ownership interest in such company's losses is less than the related stock position's market value
Mode III - Only profitable companies
The OV Tool does not automatically freeze out all loss-reporting companies from being included in the portfolio's valuation ratios. This is possible because the denominator in the OV Valuation Ratio for Earnings is the actual sum of cumulated income and losses of the portfolio companies. Standard practice is to simply exclude the loss-reporting companies or qualitatively and statistically smooth the average. The OV Tool's unique Screeining Mode function allows the manager to quickly quantify the effect of such loss-reporting companies and then choose the appropriate Screening Mode to use. OV Metrics recommends that users review the effect of such reported losses on the OV Valuation Ratios. It is a way to quantify how the average valuation is "punished" by carrying loss-reporting companies and seeing itf the potential opportunities from those loss-reporting companies exceed the impact on the portfolio's overall ratios.
Revealed for First Time: Owner's Actual Interest in Each Company's Sales, Earnings, Cash Flow and Book Value
By multiplying the portfolio's % portfolio ownership in each company's respective financial results, the OV Tool calculates teh portfolio's actual ownership interest in each of the company's sales, earnings, cash flow and book value. Then, each company's ownership interest may be studied on an absolute or relative basis to other portfolio holdings.
As an example, the OV Tool allows a user to state:
Microsoft has the following portfolio weight and accounts for the percentages of the portfolio's total ownership interests as follows:
Microsoft Google
__% portfolio weight __% portfolio weight
vs. vs.
__% of sales __% of sales
__% of earnings __% of earnings
__% of cash flow __% of cash flow
__% of book value __% of book value
The OV Tool also allows the user to rank company results on an absolute basis or by the % of the portfolio's total by simply clicking on the relevant column heading. So, instead of giving the actual % figures as above, a user could say, "Microsoft is only our 6th largest holding but it's our top generator in earnings and 2nd-highest in cash flow." From an ERISA or fiduciary standpoint, although knowing the portfolio's asset allocation is important, it is also important to know what those assets generate for the portfolio. By observing relative position weights vs. relative financial results can lead to surprising discoveries and may trigger the need for further research.
One of the questions that OV answers might well be posed by a penion fund committee to its outside manager. For instance, "What are the top three holding in size and what are the top three generators of earnings, or cash flow?" Ironically, in a field so highly quantified, that basic question goes unanswerable since portfolio analytics focuses on market price level performance and average weightings of the portfolio. OV could easily answer the question by just consulting the ownership interests in earnings and cash flow.
OV Tool's Handling of Negative Ratios
In calculating OV Metrics for P/S, P/E, P/CF, and P/B valuation ratios, OV first calculates each company's sales, earnings, cash flow, and book value for each company, and then those company results are combined---whether their values are positive or negative. The OV methodology, for the first time, uncovers which holdings are generating the portfolio's ownership interests in sales, earnings, cash flow, and book value (and to what extent). See discussion of OV Screening Modes above which describes how the user has three screening choices related to loss-reporting companies.
Portfolio managers know that there are different ways of handling stocks with negative ratios. For example, if negative P/E ratios were included in a portfolio's weighted-average P/E ratio and were weighted by the respective company's portfolio weights, such inclusion would lower the average P/E ratio for the portfolio; and vice versa if excluded.
Because of this skewing effect that negative ratios have on the weighted-average portfolio valuation ratios, some managers exclude holdings with negative ratios in their portfolio average and then simply state the percentage of the portfolio's "data availability" in their calculation. Also, there are many methods of smoothing or excluding the effect of negative ratios based on statistical and qualitative approaches. Some of these sophisticated methods of smoothing weighted-average portfolio valuation ratios tend to be reliable in the context of their application; but from a simply mathematical standpoint, excluding outliers or including them on a smoothed basis is not a true way to calculate the entire portfolio's valuation.
Unlike the qualitative techniques of excluding and smoothing, the OV method does not weight ratios based on the market value of the component portfolio holdings. Rather, OV simply cumulates the companies' combined negative and positive results. Using this combining of positive and/or negative results to establish the denominator, a true sum of the portfolio's ownership interests is defined. Then, by dividing the portfolio's total market value by this cumulated sum (of ownership interests in sales, earnings, cash flow or book value), the OV Tool calculates the four respective portfolio valuation ratios.
Ownership View regards portfolio holdings, in a sense, as a single company with component business units delivering their respective positive or negative operations and/or assets. The OV approach treats holdings much like an accountant would when consolidating various business units into one consolidated statement. Viewing a portfolio as a virtual single company interjects a healthy element of fundamentals into the normal parlance of portfolio weights and allocations. Unlike the current approach of creating a simple weighted-average ratio of P/Es etc., the user of the OV Tool can know what the subject portfolio's actual total ownership interest in the sales, earnings, cash flow, and book were (in U.S. Dollars) for the period under review. The best way to thoroughly analyze this effect is to compare the standard valuation ratios with the OV Valuation Ratios for the same portfolio. Studying the variance analysis between standard and OV can lead to a more thorough analysis of the portfolio.
Other Features of the OV Tool
Edit Buttons-allows changing actual financial results, i.e., modifying for projected results, etc.
Two Display Modes - 1) Full Metrics view or 2) Earnings-Only view (see clickable option on right side cluster of tabs). Earnings-Only view captures earnings data from the SEC Form 8-K release promptly after its release. Howver, that Form 8-K does not usually include cash flow and common stock equity. Therefore, using the Earnings-Only option around the time of earnings releases may prove valuable. The Full-Metrics view is fully consistent in that all four results must be available before any of the results are used.
Sorting Data - Click on column headings to rank results. The portfolio default view is sorting Portfolio Weights from highest to lowest. The key, unique feature of OV is being able to rank ownership interests in sales, earnings, cash flow, and book value. By comparing a company's % of the portfolio's total ownership interests to that same company's portfolio weight reveals the holdings that are pulling the most or least weight relatve to their portfolio weights. OV recognizes that there are no quantifiable way to value a particular stock, but using the underlying fundamentals provides a a starting valuation framework for further research and analysis.
Standard Stock Ratios - Standard stock ratios (P/S, P/E, P/CF, and P/B) are displayed to help in the selecting portfolio holdings.
Company Database and Watch List - Click on the Research tab to review the approximate 10,000 companies in our U.S. company database. Also, you may include 250 stocks by going to the Watch List tab.
Company Business Profile - Click on company name for data sheet on recent earnings, company website, symbol, address, high/low, etc.
Archived and Active Portfolios - Portfolios may be archived where values are frozen and/or active portfolios may be saved to reflect price and financial results changes. If you save the active portfolio and archive it, it is a simple way to see the change in portfolio value since that date of archiving.
Download and Custom Stock Functions - OV version 3.0 includes the ability to download data to spreadsheets and to manually add stocks not included in the OV database of . And, you may also subscribe for only the manual-entry-only mode. Since mutual funds, ETGFs, foreign stocks, etc. are held by many private investors, the new manual option feature is important fo a complete portfolio valuation. The manual-add option is good for stating cash and other assets at the time of vluation.
