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Valuation Metrics



The MVS methodology for calculating the intrinsic value of a security involves four metrics and relates macroscopic factors as well as company and industry-specific factors.

Metric One
The first metric is used to correlate the market outlook with investor psychology. This metric takes into account market momentum (sector and macroeconomical), volatility, and market psychology and compares these values to future growth predictors such as consumer confidence, currency rate of change, domestic GDP growth rate, and federal interest rates. The primary purpose of this metric is in order to determine if the market as a whole is generating favorable conditions for economic growth. Results from The Macro Project are used in order to gauge overall market psychology, while the VIX, and factors pertaining to market volume become variables in a two-dimensional stochastic model. At the same time, quantitative information relating interest rates, instantaneous rates of change in currency per time, consumer confidence and spending, unemployment figures and other metrics are utilized in order to 1.) predict future market robustness with a lead time of greater than 30 days, and 2.) predict and measure instantaneous differential between market price and intrinsic value.

Metric Two
The second metric is sector specific and relates the availability of investment capital, existence of government regulations, leveraging ability, and overall robustness of the industry in question. MVS primarily concentrates on emerging industries in biotechnology and other forms of high technology, especially those exhibiting high volatility. Biochemical and pharmaceutical companies are particularly predisposed to changes in government regulations, fluctuations in capital availability and cash flow, since these factors greatly impact leveraging potential. The high regulations, long lead times to prove product efficacy, and very high engineering and capital costs that are typical of the biotech industry frequently result in large differences between intrinsic and market value. These factors are even more pronounced when dealing with smaller cap companies that may have a higher cost of capital or less of an ability to leverage "economies of scale." Application of this metric generates coefficients that are applied to the matrix of terms. Each security weighs these coefficients differently, based on credit risk and rating (cost of capital), market capitalization, EBITDA, profit margin, operating margin, etc...

Metric Three
The third metric is the result of a thorough analysis of all available historic financial data for the specific company in question. This is divided into two components: one metric quantifies the current worth of the company and health of financial figures (EBITDA, operating income, debt to equity ratio, EPS, etc...), while the second takes into account leveraging and growth potential. This second component is more complex, but is completely quantitative. Historical values for P/E ratio are a central tenant of this metric.

Metric Four
The fourth metric is a scientific evaluation of all major products in the development pipeline and an analysis of the likelihood that these products will be able to achieve profitability as a result of the engineering methodologies and other regulatory hurdles that stand in the way of commercialization. This metric also takes into account specific management styles, quality of the labor force, and other subjective items that impact future development and lean manufacturing. For smaller cap companies with flat or negative earnings, along with capital availability, this is often the single most important metric in a company's valuation. As a result, the weight of this component when applied into the stochastic equation depends primarily on the market cap and P/E of the company in question.

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