For stocks under study, Absolute Cost Structures (ACS) above 70% are associated with rapid falloffs in MTQ Scores and low MTQ Scores are predictors of low Net Profit Margins.
We will be monitoring stock price performance of a basket* of stocks over the next 24 months in order to establish whether or not there is a statistically significant correlation between price performance and MTQ Scores.
If we are able to ascertain that MTQ Scores serve as predictors of price performance, those scores will become cornerstones of our stock selection process.
*Fahy Capital Management does not necessarily own shares of the stocks under study.
Note: A high score (> 0.5) implies a greater-than-even chance of an enterprise exhibiting both a high Net Profit Margin and low Absolute Cost Structure at the Long-Term Price Case at which it was evaluated.
Our Hypothesis: High MTQ Scores are a reliable determinant of Future Market Cap Growth
The MTQ Score is the 4th pillar of our updated valuation methodology. It will be published in future analyses alongside TAIC, ACS and True Value.
As expected, broadly speaking, lowAbsolute Cost Structures (ACS) are associated with highFuture Market Cap Growth (FMG) and substantially higherNet Profit Margins (NPM). One anomaly is Alio Gold, which has a study group-beating Future Market Cap Growth projection in spite of average-to-high ACS, as capital and operating costs are fairly low while share structure is tight.
When selecting stocks, the criteria on which we base overall investment decisions and weightings has grown stricter. We look for companies with True All-in Cost (TAIC)* on the lower end of the curve.
*TAIC, you will recall, includes G&A Expenses, Corporate Taxes & Royalties, Refining & Transportation Costs, Working Capital, and Exploration Budgets, in addition to all capital and operating costs. TAIC is, in our opinion, a much better reflection of a company’s true costs, as it makes an effort to include costs that are often excluded from related non-GAAP.