Compare value investing to traditional valuation methods

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Case Study: Compare value investing to traditional valuation methods using Bennington Corporation below

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Bennington Corporation is a holding company that embraces value investing by investing in companies it believes are undervalued but show strength in management. Bennington has several wholly owned subsidiaries as well as companies in which it holds a significant interest. Some of the companies in which Bennington invests in are emerging markets and are not on the major exchanges.

Because of its diverse investment philosophy, Bennington has to determine the value of traditional as well as exotic securities. Evaluating market valuations helps the company decide if the market has undervalued a security and whether the company is worth the investment. Other factors also come into play in evaluating a company including management quality and debt level.

Besides evaluating the value of a company, Bennington looks at a company's history and its ability to generate returns. Bennington takes the view that a company is a long-term partner instead of just a short-term opportunity to make a quick buck.

Although Bennington may find a company has an ability to generate strong cash stream, it also wants to buy it only if it can buy it at a discount to provide a safety net. Bennington is very selective about the companies it chooses to invest in. Bennington has an aversion to not value diversification as much as the quality of the company.

Despite Bennington's value investing philosophy, it uses some traditional measures to calculate the value of the securities it invests in. Securities trading in emerging markets may require different valuation methods. For example, other markets may not have a clear bond rating measure and Bennington has to find other ways to evaluate the risk and return on bonds. Similarly, Bennington uses various measures to calculate the value of equity securities including free cash flows, the capital asset pricing model, earnings multiples, the Gordon model, among others.

Aside from these measures, Bennington performs its own financial analysis of a firm's financial reports to look for problems and reasons why its securities are available at a low price. Bennington can evaluate if the reason for the low valuation will continue or whether investing in the company has unforeseen potential.

Conversely, Bennington avoids mergers because it believes combinations of different firms fail more often than they succeed. Bennington does not want to take over management of firms it has little or no expertise in. Instead, Bennington wants to find a Management team capable of growing the business.

Consider Bennington's value investment philosophy in relation to some of the traditional investment philosophies like diversification and buying securities with good analyst's reports. Consider the pros and cons of different valuation devices and determine which you believe have a stronger chance of finding good investments.

Suggested Reading

Massironi, C., &Guicciardi, M. (2011). Investment decision making from a constructivist perspective.Qualitative Research in Financial Markets, 3(3), 158-176.doi:

Zaremba, A. (2014). Underpricing of corporate bonds: Evidence from the CEE markets. In J. Bendekovic, M.Klacmer-Calopa, & D. Filipovic (Eds.), Economic and social development: Book of proceedings 359-368. Retrieved from

Reference no: EM131298944

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