Glossary of Terms
Blue (BL) Zone: (Zone below BL Breakpoint)
A stock in the Blue Zone is characterized by a probable balance sheet problems and
poor potential. While stocks in the Blue Zone may appear cheap, they are usually
highly volatile and underperform the market on average. This zone is also open ended,
where the only limit on price depreciation is bankruptcy. What to Look For: Pay
close attention to Zone Transitions into or out of the Blue Zone, as these are strong
signals of changes in the financial health of the company.
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Bubble (BB) Zone: (Zone above BB Breakpoint)
Lying at the top end of the valuation spectrum, the Bubble Zone attracts the highest-flying
stocks, often with spectacular results. These results, however, can be extremely
positive or negative due to the open-ended nature of the Bubble Zone. There is no
limit to the price appreciation possible in this zone. What to Look For: There are
a handful of companies that historically trade in the Bubble Zone that can provide
good buying opportunities when making positive inflections off a structural breakpoint.
Nonetheless, the majority of stocks here are well-hyped, highly-valued, and very
volatile.
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Breakpoint:
The boundary which defines a Valuation Zone. Breakpoints are defined uniquely for
each stock or index, and are represented in a Structural Valuation Chart by a numerical
price point. It is at the Breakpoint of the Valuation Zones that we expect to see
either Price Inflections or Zone Transitions.
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Efficient Stability:
An efficient balance sheet means the company has found an optimal balance between
its operational assets and liabilities. The market rewards companies with Efficient
Stability ratios by valuing them more favourably.
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Earnings Efficiency Ratio (EER)
Using an analysis of the balance sheet fundamentals and the 12-month earnings forecast
for a stock, we can calculate a Valuation Zone target for a stock. It is often easier
to think of the EER as a particular price target, or EER Price. What to Look For:
the EER exerts a pull upwards or downwards on a stock – the larger the spread between
the current price and the EER Price, the greater the pull.
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EER Potential:
The % difference between the EER Price and the current stock price. Strong potential
(and a probable rise in stock price) is considered 25% or greater, while zero or
negative potential is a warning sign of a possible decline in price.
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EER Price:
See Earnings Efficiency Ratio (EER)
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Fair Value or Fair Market Value (FMV):
Another term for the EER Price, Fair Value is the price level anticipated by a company’s
Earnings Efficiency Ratio. When the current price equals the EER Price, a company
is considered at Fair Value, with no upwards pressure exerted on the price. Because
of uncertainty in the future growth of the company, this can be considered as the
maximum price for a stock.
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Growth Dynamics:
Each Valuation Zone has a characteristic growth and profitability profile that influences
the volatility of price movements, as well as the price potential of a stock. Stocks
historically gravitate towards Valuation Zones that match their established growth
profile (i.e.: financial institutions tend to stay within the stable Normal Zone,
while technology stocks are usually found in the more volatile Super Growth or Bubble
Zones.)
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Growth (G) Zone: (between the G and SG Breakpoints)
Contains stocks that have solid growth expectations, such as manufacturing, industrial,
and consumer products companies. What to Look For: Companies which make Positive
Zone Transitions into the Growth Zone tend to do very well, and are considered good
buying opportunities.
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Growth (G) Zone: (between the G and SG Breakpoints)
Contains stocks that have solid growth expectations, such as manufacturing, industrial,
and consumer products companies. What to Look For: Companies which make Positive
Zone Transitions into the Growth Zone tend to do very well, and are considered good
buying opportunities.
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Inflection:
A process in which a stock will meet resistance and reflect off of a structural
breakpoint. Inflections can be either negative (the price stops rising, and then
declines) or positive (the price stops falling, and then rises).
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Market Valuation (MV) Ratio:
A ratio of Price to modified Book Value. Unique to each stock, this ratio identifies
which Valuation Zone the stock lies in.
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Minor Breakpoints:
Within each valuation zone there are a number of important minor Structural Breakpoints
which also cause prices to inflect. Depending on the stock, some minor breakpoints
may provide as much resistance as the major ones. What to Look For: We usually expect
a stock to encounter some resistance at minor breakpoints, and it is worth looking
at the historical trading pattern of the stock to anticipate a trading opportunity.
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Negative Inflection:
A stock rising in price meets resistance at the upper boundary to a Valuation Zone
(Structural Breakpoint) where it is normally expected to inflect and decline in
value. What to Look For: A stock with little or no EER potential is a good candidate
for a Negative Inflection, particularly if the stock does not have a trading history
above the Breakpoint.
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Negative Zone Transition (NZT):
Occurs when a stock crosses below a structural breakpoint into a lower Valuation
Zone. This event usually signifies a weakening of the company’s earnings outlook,
leading to a significant fall in the price potential of the stock. What to Look
For: NZTs are excellent predictors of impending declines in financial outlook and
value. Stocks with negative or no EER potential are good candidates for NZTs.
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Normal (N) Zone: (Zone between the BL and G Breakpoints)
Stocks historically valued in the Normal Zone are defined by the market as “non-growth
stocks”, and are typically from modest growth sectors such as Financial Services,
Resources, or Utilities. What to Look For: The Growth Price Breakpoint provides
the investor with an excellent selling tool, since few non-growth stocks make a
Zone Transition into the Growth Zone.
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Positive Inflection:
A stock falling in price meets resistance at the lower boundary of a Valuation Zone
(Structural Breakpoint) where it is normally expected to inflect and rise in value.
What to Look For: At major Breakpoints, most stocks with reasonable EER potential
will find support and positively inflect. Significant price advances are usually
confirmed by improvements in financial outlook and good EER potential.
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Positive Zone Transition (PZT):
When a stock crosses above a structural breakpoint into a higher Valuation Zone.
This event usually signifies an improvement in the company’s earnings outlook, and
usually precedes a significant rise in the price potential of the stock. What to
Look For: A PZT supported by high EER potential can lead to significant appreciation
in stock price. Investors should be patient, however, and wait until the stock has
closed 3% above the Breakpoint for 5 consecutive days in order to confirm the PZT.
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Price Inflection:
See Inflection
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Price Volatility:
Increases as a stock moves up through the Super-Growth and Bubble Zones, and especially
when a stock falls into the Blue Zone. What to Look For: Be cautious of investing
in stocks at that stray upwards into the Bubble Zone. In bull markets, such stocks
can rapidly bring tremendous rates of return; in bear markets they can quickly lead
to tremendous losses. In general, we recommend avoiding any stock that falls into
the Blue Zone.
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Resistance Point:
See Breakpoint
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Stability (or Stability Ratio):
Measures the strength of a company’s balance sheet. SVA classifies balance sheets
into 3 categories:
Weak Stability:
Ratio is from 0 to 0.499
|
Efficient Stability:
Ratio is from 0.499 to 1.7
|
Strong Stability:
Ratio is from 1.7 to 10
|
Weak balance sheets which are being restructured (a shift from Weak to Efficient
Stability) do very well in the market, and the stocks are often quite cheap. Overly
strong balance sheets which are being re-leveraged (a shift from Strong to Efficient
Stability), tend also to outperform.
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Strong Stability:
These balance sheets have very low leverage, and are penalized by the market for
not making more efficient use of their assets. The valuation attained by a company
with an overly strong balance sheet will always be below its maximum potential.
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Structural Valuation Analysis® (SVA):
The name given to SAC’s proprietary equity analysis methodology.
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Structural Breakpoint:
See Breakpoint
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Super-Growth (SG) Zone: (Zone between
the G and BB Breakpoints)
Typically the maximum valuation zone a company is able to achieve, the Super-Growth
Zone usually contains stocks with rapid earnings growth, such as technology companies.
What to Look For: Both Super-Growth and Bubble stocks tend to attract public attention
and media excitement, resulting in strong price changes both upwards and downwards.
Watch for sharp inflections off the major and minor breakpoints in these Zones.
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System Dependence:
The basic measure of a company’s ability to service its capital base. A positive
value tells us that the company is self-sustaining, whereas a negative value tells
us that the company is reliant on the financial system to supply funds for this
purpose. What to Look For: Trend values are more important here than single observations,
as certain companies such as utilities are routinely system dependent. Watch for
positive increases in this indicator.
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Valuation Boundary (or Valuation Breakpoint):
See Breakpoint
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Valuation Zones:
The backbones of the SAC methodology, the Valuation Zones influence the price potential
and volatility of a stock. The zones are bounded by structural Breakpoints, which
act as natural barriers to movement in the stock price. These breakpoints are derived
using the proprietary mathematical theory behind SVA.
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Weak Stability:
These balance sheets are usually heavily leveraged, and require much more resources
to remain intact. Below value of 0.289, the viability of the business becomes a
strong concern, as the company has pledged nearly all of its assets to creditors
and carries a risk of bankruptcy.
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Weak Stability:
These balance sheets are usually heavily leveraged, and require much more resources
to remain intact. Below value of 0.289, the viability of the business becomes a
strong concern, as the company has pledged nearly all of its assets to creditors
and carries a risk of bankruptcy.
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Zone Transition:
A process by which a stock crosses over a structural breakpoint and enters into
a new Valuation Zone. Transitions over major breakpoints signify a change in the
way the market is evaluating the growth dynamics of the equity. Zone transitions
can be both Negative (the stock crosses over into a lower Valuation Zone), or Positive
(the stock crosses over into a higher Valuation Zone).
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