Stock View Explained

Apollo Key Valuation Charts

On the first page of each stock view are the three key valuation charts. The main chart is normally illustrating the key Apollo focus, with two smaller additional charts, further supporting our view.

Apollo Fair Value (FV)

What: A 2-year chart of the share price, with our proprietary Fair Value (FV) overlaid in orange.

Why: The Apollo FV is a core component of the Smart Alpha calculation and allows the user to know not only where value is but what expected return is implied. The detailed explanation can be read here and a worked example can be seen here.

How: The interpretation should focus on both the trend and direction of the FV line and the current degree of discount or premium to that level.

Discount/Premium to FV

What: A 2-year graphic representing the discount/premium to FV (blue histogram) as a %, and the longer term trend discount/premium to FV (orange line).

Why: To highlight how far the stock is trading from FV and the scale of the potential alpha opportunity available. We can also view the trend in the longer term discount rate in order to assess whether a stock is being re-rated.

How: If we observe the extent to which the current level diverges from the trend discount to FV(expected return) we can identify the net discount to FV (excess return) opportunity. If the longer-term trend discount rate is falling (the orange line is rising) then the stock is potentially being re-rated.

Risk & Skew

What: A 2-year graphic of the Apollo risk score (blue histogram). Skew (orange line) is the stock’s propensity to react to news flow. The score is normalised between -5 and +5.

Why: The Apollo Risk Score is a normalised version of the net DFV measure, which allows us to see the degree of risk assumed - and hence the alpha opportunity available – in direct comparison against its peers.

How: The risk score is mean-reverting and so is significant when at an historic extreme, peak or trough. When reading skew, a value above 0 (positive skew) indicates the stock is more likely to react well to positive news flow and vice versa.

Fair Value Range

What: A 2-year chart showing the share price and a +/- 2 SD volatility band (orange lines) based around the relationship between the price and the change in the net DFV trend (blue line).

Why: The FV range gives us an indication of whether the share price is primarily value-driven (trading inside the range) or more momentum-driven (when the stock leaves the range). The trend direction of the mid line provides a clear indication of the direction of short term expected return.

How: When using this graphic, take note of the trend, as well as the width of the FV range, which serves as an indicator of value-based volatility.

Long-term return forecasts

What: A 5-year chart showing an optimistic / pessimistic scenario around our longer term measure of Intrinsic value - equivalent to 12- month expected return forecast.

Why: A measure of the historic extreme discount / premium to FV can provide a useful indication of the most optimistic/pessimistic range within which a stock might trade 12 months from now.

How: The interpretation is focused on the current valuation in relation to our most optimistic and pessimistic scenarios – defined as the 2-year rolling extreme Discount/Premiums to FV.

Apollo Margin of Safety Range

What: A 2-year graphic displaying the share price (black line) along with the Apollo Intrinsic Value (blue line) and the Apollo Margin of Safety range.

Why: The concept is to identify the price at which the stock is so cheap (or expensive) relative to Intrinsic value, that the cost of an option to buy (or sell) it at that point is the same as an option not to hold it. In other word’s where the trade is academically risk-free. A worked example can be seen here.

How: The interpretation is a visualisation of risk and reward. Three things should be considered: the position of the price within the range, the trend of intrinsic value and the width of the range.

Apollo Value Indicator

What: A 2-year graphic representing the position of the share price within the Margin of Safety range as a percentage (0% represents lower margin, 100% represents upper margin). The green and red markers represent the 20% and 80% levels.

Why: As a Pareto implied “rule of thumb” we suggest investors accumulate stocks that are within 20% of the bottom of their Margin of Safety range and reduce those that are above 80% of the top of their ranges.

How: The graphic should be interpreted in conjunction with the Apollo Margin of Safety graphic itself but the limited occasions upon which the boundaries are approached indicates the significance of the indicator breaching these levels.

Sidebar Graphics

The sidebar on the right-hand side of the first page displays a variety of Apollo metrics. These give a quick snapshot of the key figures and are displayed in an easy-to-digest format.

Fair Value Drivers

What: The top graphic demonstrates the five key drivers of value and how they have changed over the last two years. The graphic below it highlights how the drivers have changed over the last three months.

Why: The FV drivers are coefficient outputs of the Apollo regression model displayed weekly. They indicate the relative significance of each of the 5 fundamental inputs within our FV calculation.

How: The interpretation should focus on the most significant drivers at any point in time and which drivers are changing most significantly.

Apollo Value Growth

What: Gives the % Change for both Fair Value (FV) and Intrinsic Value (IV) over a one and three month period.

Why: The recent growth in Fair Value and Intrinsic value is key in our interpretation of a stock’s potential alpha. It is rare for price to be sustainably rising against a declining value trend so it provides a good early warning of changing valuation risk.

Price Targets & Expected Returns

What: The table gives both the absolute price target and expected return (in %) over a number of time periods.

Why: In order to identify alpha we need to calculate expected return forecasts over varying time horizons. We combine these expected returns with our analysis of the current and future net DFV to provide a set of daily updating price targets.

How: Apollo generates (on a daily basis) a consistent set of price targets for 1, 2 and 12 month forecast horizons. We also generate a most optimistic and most pessimistic 12-month target based on the historic extreme premium/discount to FV.

Valuation Ranges

What: The Valuation Range charts show where the share price (blue triangle) currently sits in relation to its short term and longer term valuation metrics.

Short-term: The chart on the LHS shows the price in relation to its historic (2 year) discount/premium to FV and where the stock is in relation to its current FV range. In both instances, the percentile rank is shown.

Long-term: The chart on the RHS shows where the stock price is trading in relation to the 12m Optimistic/Pessimistic range and the Apollo Margin of Safety Range.

Peer-view Graphics

On page 2, we display four charts that display the focus stock relative to its key peers within its Sector Index (based on the Stoxx 600 sectors for Europe, Stoxx 1200 Asia sectors for Asia and the S&P 500 sectors for the US).

Apollo Risk/2m Expected Return

What: The Apollo Risk and 2-month Expected Return chart shows the 6 closest peer stocks selected by the author (yellow balls) out of a total of 20 most significant stocks in the feature stock’s sector peer group (blue balls), along with the stock itself (orange ball).

Why: Normalising each company’s risk in the form of the Apollo risk score (from -5 to +5) allows each stock to be fairly compared to its peers and the balls chart gives a quick snapshot of how the focus company compares on a risk/ forecast 2m return basis in the near-term.

How: Stocks in the top left quadrant have a positive Apollo 2m expected return with risk priced in. Those in the bottom right quadrant are risk assuming with a negative Apollo 2m expected return. The chart is interactive and the stocks can be identified via a “hover box”. Specific areas of the chart can also be zoomed in on.

Apollo Value/Growth in IV

What: The 3-month change in Intrinsic Value (x-axis) is plotted against the Apollo Value Indicator (y-axis) and shows how the featured stock relates to its selected sector peers from a longer-term value perspective. The pareto 20:80 percentile lines (green, red) are included for reference.

Why: This chart allows you to visualise the longer-term value opportunity and also takes into account the 3m Intrinsic value change, which highlights the strength of the growth driver underpinning the stock.

How: Typically the best buying opportunities are to be found in the lower right quadrant (strongest growth in Intrinsic Value with lowest Value Indicator score) and the opposite is true for sell ideas.

Relative Sector Chart

What: This graphic shows how the share price, Fair value and Intrinsic value for the featured company have performed relative to their corresponding sector metrics (or occasionally its local market) over the 2 year period.

How: All three data sets are normalised from 100 (500 trading days ago), so the interpretation is the evolving 2-year performance.

Peer Investment Profile

What: This percentile ranking chart shows, at a glance, how well the stock sits relative to the selected sector peer group across a range of valuation factors. Each red line shows the selected peer group average on the percentile scale of the sector distribution. The blue line shows the stock’s own percentile ranking.

Why: In all instances, a higher percentile score is a “better” result – i.e. stronger growth in intrinsic value, greater expected return, cheaper in terms of value and lower in terms of volatility. If the stock scores “100” or “0” it means it is the best/worst candidate within its sector.

How: The measures shown are the 3m IV Growth, the 12 month expected return, the Apollo Value Indicator (where the stock sits within its Apollo Margin of Safety Range) and a Volatility Measure determined by the width of its FV trading range.

Peer view summary table

Summary: Shows data for both the feature stock and a selection of 6 sector peers, including the Apollo star rankings and risk scores, alongside the current price and one-month price change. We then separate the table into a range of shorter-term indicators based around FV and longer-term signals relating to IV.

Short-term: For the short-term metrics, we show FV itself, the discount/premium to FV along with its median and the 1-month % change in FV.

Long-term: For the longer term it is Intrinsic Value, the current discount or premium to that level, the 3-month % change in IV and finally the Apollo Value Indicator, which shows where the stock sits within the Apollo Margin of Safety Range on a percentile basis.

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