Exploiting EBITDA/Net Debt - Kailash Concepts

Introduction: Revisiting the Collapse
Using Kailash’s Models to Exploit Mispriced Capital Structures
S&P500
Russell 1000
Small & Mid Cap
Conclusion
Exhibits

Introduction: Revisiting the Collapse

In our last paper, The Collapse of Common Sense, Kailash noted that the world seemed to have suffered some sort of Fed-induced intellectual decay where the relationship between fundamentals and perceived risk had inverted. Specifically, we quintiled the universe by EBITDA/net debt ratios¹ and dubbed those with the highest coverage ratios “Durable” and those with the weakest financial structures “Fragile.” The partitioning using these characteristics proved practical as there was substantial autocorrelation between margins, leverage, free cash flow yields and returns profiles across the cohorts. For convenience, Kailash has reprinted the primary conclusion from that paper in Fig. 1 below with Fragile firms in red, Durable firms represented by the dark blue bars in the middle and the universe values represented by the light blue bars on the right of each group².

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As a reminder for our Financial Advisors: our models are available on a continuous basis, and most have been in production for over a decade. If you are looking for simple, concentrated, low turnover, and tax efficient model portfolios we would like to talk with you. KCR also offers a wide range of easy-to-use but sophisticated tools. Our toolkits can help identify mispriced stocks with the best and worst risk/reward characteristics, estimate a stock’s duration and warn you when a company is engaging in low-quality accounting. Over the last 12 years, KCR has built and offers time-tested and class-leading products built by experienced and proven money managers for fixed to low prices.
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