Emanuele Rossi

A Portfolio Approach: Multiples’ Accuracy and Stock Selection

We investigate whether a stock selection strategy based on multiples’ accuracy can provide sustainable returns. More specifically, the aim of this part is twofold. On the one hand, we try to test whether a link exists between large valuation errors and future price performance; and on the other, to understand if the multiples previously introduced can be utilized as investment criteria to build profitable investment strategies.

Accuracy Performance of Relative Valuation

In this chapter we focus on multiples’ performance in the US stock market. The main aim is to examine the effectiveness of a broad selection of commonly used multiples and to understand if a specific multiple exists that is able to outperform the others. In doing so we are able to widen the comprehensive understanding on “market performances” of the tools practitioners are handling in their everyday work. In addition, a relevant feature of our work is that we are able to provide a detailed ranking across industries of the metrics performances, from which we can detect which sector or industry presents better or worse performance in terms of multiples accuracy in predicting the market price.

Relative Valuation: Issues and General Framework

A general overview of equity relative valuation, analyzing its assumptions, strengths and weaknesses, is essential. Equity valuation is a main application of finance and accounting theory. The theoretical emphasis usually focuses on discounted cash flow (DCF) and other equivalent models which are grouped as absolute valuation methods to equity evaluation. These models come up with some drawbacks when practitioners try to implement them. Market-based valuations based on multiples, on the other hand, present many advantages but we must be aware of their limitations too.

The Europe 2020 Project Bond Initiative

The new instrument of the Project Bond Initiative (PBI) developed jointly by the EU and EIB was established with the aim of relaunching and revitalizing the project bond market in Europe, which reached a standstill in the aftermath of the financial crisis. Looking at its funding experience in transactions coming from Western Europe projects achieving the financial close during the initial pilot phase, we try to extract from the available case histories the main features and the best practices that have triggered the success for financing these projects so far.

Case Studies in CEE

The empirical European market evidence shows how the project bonds, as an alternative financing solution in certain infrastructure projects, can play an important role.

European Infrastructure Project Finance Market

Project finance in Europe has been negatively impacted by recent events; however, there is widespread opinion on the necessity of relaunching a certain level of investment in European infrastructure.

Bank Conventional Lending versus Project Bond Solution

Project bonds, which can act as a substitute for a conventional term loan bank financing, are surely the best alternative financing solution. We have noticed several recent project finance deals involving project bond funding in the European market, and it is adapting quickly to the changing market situation. From a general perspective, it is important to highlight and examine the advantages and disadvantages comparing a traditional amortizing bank loan versus a project bond funding solution. This is crucial in order to help us illuminate the decision-making process for the best available financing structure solution for prospective projects.