ROIC & P/E (INTRINSIC) REVERSAL DIRECTION

Subject:

ROIC & P/E (INTRINSIC) REVERSAL DIRECTION

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We know that the Return will reverse from ROIC to a Mean Value in the long run.

How do we deal with it?

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What is the Mean ?

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1.

The mean should be value constructive and more than Capital Cost:

ROIChigh < RETURNmean < Capital Cost

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For the Capital Cost, I would choose CICC & CTAC for the respective Invested Capital and Total Assets, instead of WACC.

WACC is not fundamental.

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2.

The reversal could be broken down into five stages:

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RETURN REVERSAL DIRECTION: 5 Stages

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ROIC ➡️ √(ROIC × ROA) ➡️ ROA ➡️ √(ROIC × CICC) ➡️ √(ROA × CTAC) ➡️ ⁴√(ROIC × ROA × CICC × CTAC)

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If I assume the RETURNmean determines the Intrinsic Value in Linear,

then,

P/E (INTRINSIC) REVERSAL DIRECTION will equal RETURN REVERSAL DIRECTION.

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P/E (INTRINSIC) REVERSAL DIRECTION: 5 Stages

ROIC ➡️ √(ROIC × ROA) ➡️ ROA ➡️ √(ROIC × CICC) ➡️ √(ROA × CTAC) ➡️ ⁴√(ROIC × ROA × CICC × CTAC)

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The Long Term Return may land and linger on one of the FIVE below:

√(ROIC × ROA)

ROA

√(ROIC × CICC)

√(ROA × CTAC) : P/E (Bottom Valley 1)

⁴√(ROIC × ROA × CICC × CTAC) : P/E (Bottom Valley 2)

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Which one?

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No idea.

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But intuitively I would say:

(1)

The more competitive advantageous a company is, the higher the P/E (Intrinsic) will land and linger on in the long run.

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(2)

Any Quoted P/E Below ROIC are undervalued.

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(3)

The degree of Undervaluedness or MOS deepens when Quoted P/E goes down the line.

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(4)

⁴√(ROIC × ROA × CICC × CTAC) & √(ROA × CTAC) are the “Two P/E (Bottom Valley)s” with the highest MOS or Undervaluedness.

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(5)

Any Quoted P/E which is less than the “Two P/E (Bottom Valley)s” are “Abyssly Undervalued”, Munger suggests ALL-IN.