When corporate raiders like Carl Icahn and renowned investors like Warren Buffet value a company, one can be sure they go beyond a back of the envelope calculation,and dig deeper into debt ratios, earnings growth, fixed costs, cash flow from operations, dividend policies, and other financial metrics. We can assume their teams of accountants and financial analysts use spreadsheets, but what else? What's their secret sauce? Do they have proprietary models?Figuring out what a company is worth can be tricky especially if you want to compare a company to stock investment alternatives going back 20 years. I recently spoke with Jonathan Greenberg, CEO of OCE Interactive, the developer of Market Topographer, an interactive Web-based platform for benchmarking and valuation analysis of U.S. stocks. The company announced the patent-pending system in January offering a fresh approach to stock comparisons.
"People are curious about finding ways of doing a better job around valuations," says Greenberg, who spent 13 years in investment banking at Salomon Brothers and at Lehman Brothers, before forming a think tank for conducting research, from which the software product evolved. "I worked on many large mergers in my banking days as well as equity financings," Greenberg said in an interview with Wall Street & Technology. "It became very evident to me and troubled me, that (there) was so much subjectivity for buy and sell side equity valuation technology. It was still many decades behind where fixed income valuations technology is. And that is not surprising since fixed income is much more scientific than equities," said Greenberg. Greenberg, co-founded the company together with Michael Lockitch, CFA and Andrew Schnmolka, former investment bankers with bulge-bracket firms, to create a system that would bring a more scientific process to valuation of equities. "When comparing companies with multiples, there is no apples-to-apples comparison because no two companies are the same," says Greenberg. In fact, the founders have devoted six years to researching and development of Market Topographer's underlying technology, emphasized Greenberg. The platform demonstrates how the market is systematically rewarding and penalizing company valuations at any point in time, according to the release. It can evaluate the future expectations priced into a stock to help determine whether they are reasonable.
Under the hood of Market Topographer contains a cross sectional, multi-factor regression model, which crunches data across about 1,800 stocks per night. Although the universe it covers is much broader than that, every night the model comes up with sensitivity factors to figure out how much the valuation level is attributable to 12 risk characteristics, including leverage, dividend payments and dividend policies. It obtains the raw data from partners including Thomson Reuters, Capital I.Q. and Standard & Poor's. Greenberg says the data is put through tremendous scrubbing to prepare it for its models. The company has six patents pending on its technology. "There's a lot of sophistication that goes into making the data usable and comparable and then running it through our algorithms," said Greenberg.
Market Topographer can calculate how sensitive the market is on a given day to financial leverage or dividend policy or dividend payouts, said Greenberg. "By combining these 12 characteristics, it gives a good snapshot and accounts for the vast majority in systematic differentiation in valuation across companies," said Greenberg.
Because OCE Interactive has back-filled its database 20 years to 1990, it allows an investor to compare a trading multiple of Google today against the trading multiple of Microsoft at the height of the Internet bubble. While people in finance try to compare valuation differences via price/earnings (p/e) price to sales ratios, the obstacle is "the market that you're in dictates to a very large degree what the multiple should be to a certain set of characteristics, so you can't compare it," says Greenberg.
One of the key strengths of the system is the ability to compare the risk profile of companies, by stripping out the systematic differences, currently, historically and across time.
"We can normalize the difference between those two market conditions between the two dates and leave you with an apples-to-apples comparison," contends Greenberg. "The whole purpose of the platform is to level the playing field in looking at comparisons between companies," Greenburg explains. "You can strip out the market conditions, you can show the comparison as if you were looking at the two companies today," he said.
Illustrating the concept, Greenberg says a comparison between the stocks of Apple Computer today can be made with Dell Computer in 1999. Though the (p/e) multiple of Dell was materially higher than Apple today, when market conditions are normalized the differences in multiples dropped from 35 down to one point. A video on the company's web site explains how Starbucks can be compared with McDonald's stock. Since Starbucks has a price-to-earnings (p/e) multiple of 20.6, while McDonalds has a multiple of around 15.5. Intuitively, that's because Starbucks has a smaller earning base, and will sustain a higher level of growth than McDonalds and should receive a valuation premium. "But would you know how to go about calculating that premium?" asks the narrator in the video, who assesses the differences in multiples on the pro and con side. From the con side of the ledger, Market Topographer, shows that Starbuck is 4.3 multiple points lower due to its lower dividend pay ratio, which is factored into its premium.
Upon announcing the product in January, Greenberg was having back-to-back meetings with Wall Street firms, to show the system. He found high interest for the stock analysis platform among hedge funds and portfolio managers and analysts. Outside of the buy-side, the firm is finding applications of this technology to sell-side equity research, investment banking and the financial advisory community. For instance, in the pipeline, modules are in the works for pairs trading that is not yet released yet, and one for the M&A investment bankers. The intent will be to roll that out with the Market Topographer, said Greenberg.I recently spoke with Jonathan Greenberg, CEO of OCE Interactive, the developer of Market Topographer, an interactive Web-based platform for benchmarking and valuation analysis of U.S. stocks. Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio