Visual fundamental analysis

[i4value]

hi i4value,

My 2 cents' worth:

(1) I disagree that MOS is the difference between market price and intrinsic value. MOS comes from the quality of the company, not valuations. Valuations determine the quantum of returns.
I have seen growth folks overpaying for quality - Do they have MOS? Yes. Are they going to underperform? Yes.
I have seen value folks overpaying for underquality - Do they have MOS? No. Are they going to underperform? Probably Yes.

(2) Based on my personal experience, the "Low-Poor" quadrant is more like "value traps" than "turn-arounds" as you euphemistically termed. The only time "value-traps" turnaround, are when they have/plan some sort of actions. These actions are dynamic, subjective and may not be captured quantitatively. So a 2-axis scatterplot may be overly simplistic, IMO.

(3) And based on your experience, have you seen any "Low-Good" quadrant goldmine?

I thought that the MOS was a terminology from Graham to illustrate the difference between the market price and the business value. And while I would agree that that there is some link between quality and margin of safety, I think that the link flows from valuation. Based a DCF approach, a high quality company would probably have lower discount rate (lower risk), lower Reinvestment rate and better profitability. The last 2 items flow into the free cash flow.  

I tend to think that the key driver for the margin of safety is market sentiments. For a company, if Mr Market is fearful, you will have a bigger margin of safety than when Mr Market becomes greedy and start chasing the company.  That is why in the Fundamental Mapper I have the margin of safety (Investment risk) as a another dimension than business performance. 

As for turnarounds, I am looking from the business angle ie improvements in business performance rather than from a market sentiments perspective. Value traps is focussing on the pricing perspective. A value trap is cheap because it has fundamental performance issue. At turnaround is cheap because the market has yet to recognize the improvements it had made. 

But you make an interesting point - there are two types of investors. Those that focus on business performance first and those that focus on price first.