Appendix II: Glossary of Investing Terms
Book Serialization | Quality Value Investing: How to Pick the Winning Stocks of Enduring Enterprises
Welcome to Appendix II of my next book, Quality Value Investing: How to Pick the Winning Stocks of Enduring Enterprises.
I am writing the book on Substack Finance as part of the QVI Newsletter and look forward to subscribers’ support and feedback as we produce the manuscript in real time.
Appendices appear in the back matter of a nonfiction book as supplemental information of an explanatory, statistical, or biographical nature. The author includes an appendix to benefit readers, which would otherwise break up the synergy of the main body content.
Appendix II is a reference guide to the essential investment terms for quality-driven value investors.
Appendix II
Glossary of Investing Terms
Appendix II is a reference guide to the essential investment terms for quality-driven value investors, presented alphabetically.
A
Alpha is the excess return of an investment above what would be expected based on its perceived risk level and whether a stock or investment’s total return performs better than the market or a benchmark such as the S&P 500.
B
Basis Points or bps is a standard measuring unit of percentages in finance. For example, one basis point is equal to 1/100th of 1%.
Bearish View is an unfavorable outlook on a company and its share price, an industry, sector, or market.
Behavioral Investing applies cognitive behaviors such as rational thought, discipline, and patience to a quality-driven stock-picking strategy.
Benchmark is a standard or metric used to measure the performance of a stock portfolio or other financial instruments over time. Benchmarks assess an investment’s performance against the market, peers, or the investor’s minimum goals.
Beta gauges a stock’s volatility or systemic risk compared to the market as a whole. For example, the S&P 500 beta is constant at 1.00.
Bullish View is a favorable outlook on a company and its share price, an industry, sector, or market.
Business Model is a strategic plan for how a company will drive profits and cash flows. The model describes how a business develops its product or service, offers it to the market, and drives sales.
C
CAGR is the acronym for the compounded annual growth rate of a stock price’s total return or a company’s business metrics.
Capital Allocation is distributing and investing a company or investor’s financial resources to increase efficiency and maximize profits. A company’s management or an investor aims to allocate capital in a way that generates the most wealth for its shareholders or portfolios.
Cash Flow Margin measures earnings quality or operating cash flow divided by trailing sales.
Catalysts involve anticipated (confirmations) or surprise events (contradictions) that could accelerate or decelerate the investment thesis. Quality-driven investors limit catalysts to second opinions on their facts-based analysis because of the speculative nature of what the bulls and bears are saying.
Checklist Investing employs a rigorous yet straightforward methodology for researching and analyzing a company’s business model and share price value.
Closing Share Price is the exchange-traded last market closing price of one share of stock as of the report date.
Company Profile briefly describes the enterprise’s business model and its products or services.
Competitive Advantage is a quality or attribute that allows a business to outperform its competitors. Quality-driven investors favor companies with durable competitive advantages.
Concentrated Portfolio is an investment strategy where a large portion of the capital allocation is in a small number of securities, resulting in limited diversification and a higher risk profile than a diversified portfolio. Concentration offers higher potential returns if the investments are limited to quality acquired at reasonable prices.
Confirmation Bias is the tendency to interpret new evidence as validation of one’s beliefs or theories. Investors are prone to confirmation bias when researching and analyzing data and opinions on a company, stock, fund, industry, sector, or market.
Cost Basis is the average purchase expenditures for each company share in a stock portfolio.
Current Ratio is the short-term debt coverage or total current assets divided by total current liabilities for the same period. The current ratio measures a company’s near-term balance sheet liquidity.
Current View of buy/bullish, hold/neutral, or sell/bearish reflects the call for each company and its underlying stock based on a review of applicable research indicators, including the value proposition, fundamentals, returns to shareholders, valuation, and downside risks.
Current Wealth is the analyzed near-term metrics of a company’s business model.
D
Debt to Equity is the ratio used to evaluate a company’s financial leverage, calculated by dividing its total liabilities by its shareholder equity. Investors should become concerned only when a company’s debt exceeds its equity.
Disclaimer is a written or audio statement of pertinent information, such as inherent risks, used by investment firms, financial bloggers, and others in a role that investors may turn to for general advice or investment education.
Disclosure is a written or audio statement of how biased information revealed about a company and its stock may unduly influence an investor’s decision.
Dividend Yield indicates how much a company expects to pay in average dividends for the forward twelve months relative to the current share price.
Dividend Yield on the Cost Basis or YOC is the annualized dividend payout divided by the cost basis of the common shares held in a portfolio. YOC is the antithesis of the more risky forward high-yield dividend investing.
Downside Risks are the potential asymmetrical risk/rewards of the company and its share price assigned by individual investors and market observers. Weighted measures of investment risk are high, above average, average, below average, or low. Quality-driven investors are biased toward below-average-risk and low-risk profiles.
Due Diligence is an investor’s independent research and analysis of a publicly traded company and its underlying stock.
E
Earnings Growth measures how much a company’s net income or earnings per share have increased over a specific period. It’s usually calculated as a percentage change and can be used to determine a company’s level of enduring profitability.
Earnings Per Share, or EPS, is a metric that measures a company’s profitability by indicating how much profit each share of common stock has earned. Calculate EPS by dividing a company’s net income by the total outstanding shares.
Earnings Yield is the inverse of the price-to-earnings ratio or trailing P/E. Earnings yield indicates how much a company earns each year per common share relative to the stock price. It is calculated by dividing EPS by the share price.
Economic Moat is the competitive advantage or value proposition a company’s products or services hold over other businesses within the same industry. Morningstar is the leading authority on competitive advantage research. Warren Buffett, founder and chairman of Berkshire Hathaway, is credited with coining the term. Alpha-rich investors target companies with clear competitive advantages. An investor or analyst can streamline the value proposition of an enterprise with an economic moat assignment of wide, narrow, or none.
Emotional Intelligence is an individual’s capability to be acutely aware of the sentiments and motivations of self and those of others, discerning between different feelings and addressing each as appropriate.
Enterprise Value to Operating Earnings or EV/EBIT is the stock’s market capitalization plus the company’s debt, minority interest, and preferred shares minus total cash and cash equivalents or EV divided by earnings before interest and taxes or EBIT. EV/EBIT measures whether a stock is overbought (a bearish signal) or oversold (a bullish signal) by the market.
Equity Bond Rate estimates the intrinsic value of a stock price or its shareholder yields. It tells us whether a stock is worthy of the assumed higher-risk profile compared to the perceived safer intermediate-term government issue.
F
Free Cash Flow Yield indicates how much a company generates in free cash flow per common share relative to the stock price. Free cash flow per share is the cash available after operating expenses and capital expenditures divided by shares outstanding at the end of the most recent fiscal period.
Fundamental Analysis is the curation of qualitative and quantitative information and data that reflect a company’s financial and economic position or its overall returns from management performance.
G
GAAP is the acronym for generally accepted accounting principles.
Gross Profit Margin is a company’s first line of earnings after deducting its costs, calculated as total sales or revenue minus the cost of goods or services sold, expressed as a percentage.
H
Hedging is an investment strategy that helps limit financial risk. A hedge works by holding a complimentary investment that historically moves in a different direction from the core holding so that if the core investment declines, the hedge offsets or limits losses.
I
Index Fund is a mutual or exchange-traded fund (ETF) that tracks the performance of a specific market constituency by holding a representative sample or all of the securities in that index. The goal of an index fund is to mirror the targeted performance of the basket as closely as possible.
Internal Customers represent a company’s employees, board members, suppliers, and vendors.
Intrinsic Value is the perceived or calculated value of an asset, investment, or company derived from fundamental analysis.
Investment Thesis summarizes why investors or analysts rate the company and stock as buy/bullish, hold/neutral, or sell/bearish, based on the most recent research and analysis.
L
Long-Term Debt Coverage measures current assets divided by long-term debt. A favorite of the legendary value investor Benjamin Graham, it demonstrates balance sheet liquidity or a company’s capacity to pay down debt in a crisis.
M
Macroeconomics is the branch of economics that deals with the structure, performance, behavior, and decision-making of the whole, or aggregate, economy.
Margin of Safety is a principle of value investing where an investor purchases securities when the market price is below the perceived intrinsic value.
Market Capitalization denotes whether the stock is a large-, mid-, or small-cap. Refers to the total value of a company’s shares of stock, calculated by multiplying the current market price by the total number of outstanding shares.
Microeconomics is the branch of economics that considers decisional behavior and outcomes within the economy, including individuals, households, and organizations.
MRFY is the acronym for the most recent fiscal year.
N
Net Profit Margin is the percent of revenues remaining after paying operating expenses, interest, and taxes divided by sales for the trailing twelve months, also known as NOPAT or net operating profit after taxes.
Neutral View is an impartial or range-bound outlook on a company and its share price, an industry, sector, or market.
O
Owners’ Earnings are a test of shareholder value, such as the annualized five-year trailing company’s EPS growth plus dividend rate growth.
P
Payout Ratio is dividends paid divided by after-tax earnings. The lower the payout ratio, the safer the dividend in the context of its coverage by earnings or other available capital.
Portfolio is a collection of stocks, funds, or other securities an investor owns. The goal of a managed portfolio is to generate wealth or achieve financial objectives over time.
Present Value is the analyzed near-term metrics of a stock’s estimated intrinsic value.
Price-to-Operating Cash Flow or P/CFO is the previous closing stock price divided by cash flow from operations per share for the most recent fiscal year. Price-to-cash flow measures the stock price relative to operating cash flows before capital expenditures.
Price-to-Sales Ratio or P/S is the closing stock price divided by the sum of sales per share over the trailing twelve months. Price-to-sales measures the stock price relative to revenue.
Price-to-Trailing Earnings or P/E is the closing stock price divided by the sum of GAAP diluted earnings per share over the trailing twelve months. P/E is the inverse of the earnings yield.
Products and Services are the company’s essential offerings, whether tangible goods or intangible services.
Publicly Traded Company is a corporation whose shareholders have a claim to part of the company’s assets and profits. Organized via common or preferred stock shares, and intended to be freely traded on a stock exchange or in over-the-counter markets.
Q
Quality-Driven Value Investing is an investment strategy combining value investing principles with a focus on high-quality companies. Commonly referred to as quality at a reasonable price.
R
Return on Equity or ROE is the income available to common shareholders for the trailing twelve months divided by the average ownership equity from the most recent fiscal period and the year-earlier fiscal period, expressed as a percentage. Reveals how much profit a company generates from shareholder investment in the stock. Board-authorized share repurchase programs typically accelerate ROE.
Return on Invested Capital or ROIC is net income after taxes divided by the average of total equity plus the sum of total long-term debt, other liabilities, deferred income tax, and minority interest expressed as a percentage. ROIC measures how well a company uses capital resources to generate excess returns.
Revenue Growth is the compounded annual growth rate of revenues or net sales over the specified period calculated as a percentage.
S
S&P 500 Index is a stock market index tracking the performance of the 500+ largest companies by market capitalization listed on stock exchanges in the United States.
Shareholders Equity refers to the assets remaining in a business once all liabilities settle. Calculate the equity by subtracting total liabilities from total assets.
Short Interest as a Percentage of the Float represents the percentage of outstanding shares that investors have borrowed to sell short and have yet to cover or close the position. The short interest provides a sentiment indicator of whether the market is betting the price of a stock will fall.
Stock Profile describes a public company’s ticker symbol and classifies it as a large-, mid-, small-, or micro-cap stock trading on major or over-the-counter exchanges.
Stock Split is when a company increases (or sometimes decreases in a reverse split) the number of stock shares to boost the stock’s liquidity. Although the number of outstanding shares increases by a specific multiple, the total dollar value of all shares remains the same because a split does not fundamentally change the company’s value.
T
Ten-Year Treasury Note is a debt obligation issued by the United States government with a maturity of 10 years upon initial issuance. The prevailing yield is the fixed interest payment to the bondholder divided by the closing price of the note.
Ticker is the stock symbol or acronym of a public company’s shares on an exchange.
Total Return is the combined percentage return over time of capital gains accrued and dividends paid, if any, from the investment, adjusted for stock splits.
Total Return Performance charts the stock’s historical performance versus its industry, sector, or broader market benchmarks.
TTM is the acronym for trailing twelve months.
U
US Securities and Exchange Commission, or SEC, is a federal government regulatory body that oversees the public equities markets in the United States.
V
Valuation is the investment research process of identifying stocks trading below their intrinsic value, providing a margin of safety. The methodology compares the current stock price to the company’s intrinsic value derived from select valuation methods.
Value Proposition is the competitive advantages a company’s product or services offer its customers compared to the industry, sector, or marketplace.
W
Watchlist is a listing of assets, such as stocks, bonds, funds, or indexes that an investor monitors to track their prices and trends for potential purchase or addition.
Weighted Average Cost of Capital or WACC illustrates the corporation’s cost of capital, weighing each category in proportion. All sources of capital, including common stock, preferred stock, bonds, and any other long-term debt, are included in a WACC calculation. ROIC should exceed the WACC by a comfortable margin to demonstrate management’s ability to outperform its capital costs.
Y
YoY is the acronym for year-over-year growth rates.
Book Appendix is copyright 2024 by David J. Waldron. All rights reserved worldwide.
About the Author
David J. Waldron is the contributing editor of Quality Value Investing, and author of the international-selling book Build Wealth with Common Stocks: Market-Beating Strategies for the Individual Investor. David’s mission is to inspire the achievement of his readers’ financial goals and dreams. His work has been featured on Substack Finance, Seeking Alpha, MSN Money, TalkMarkets, ValueWalk, Yahoo Finance, QAV—Australia’s #1 Value Investing Podcast, Money Life with Chuck Jaffe, LifeBlood with George Grombacher, The Acquirer’s Multiple, Capital Employed, Amazon, Barnes & Noble, Apple Books, the BookLife Prize, and Publisher’s Weekly. David previously enjoyed a 25-year career as a postsecondary education executive. He received a Bachelor of Science in business studies as a Garden State Scholar at Stockton University and completed The Practice of Management Program at Brown University.
Resources
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Comments are open to premium (paying) subscribers. What other quality-driven value investing terms should I add to the Glossary?
