Value is not a low multiple: A broader framework for identifying undervalued businesses

Value investing is frequently defined by what it is not: it is assumed to mean low multiples, weak recent performance or companies facing visible headwinds. In our view, this framing is incomplete. A low next-twelve-month (NTM) price-to-earnings (P/E) ratio is not, in itself, evidence of value. Nor does a rising share price preclude a business from being undervalued.

We define value as a misalignment between price and medium- to long-term fundamentals. The essential question is whether the market is underestimating a company’s forward earnings power, cash generation or asset value. That misjudgment can arise for different reasons, and understanding the source of the error is central to disciplined investing.

This is why we assess valuation through a longer-term lens, often anchoring on a fiscal year six (FY6) P/E rather than an NTM multiple. Looking out to FY6 requires us to form a view on what the business could be earning once margins have normalized, growth initiatives have matured and capital allocation has had time to compound per-share value. A multi-year horizon allows us to incorporate margin normalization, structural growth, competitive durability and balance-sheet evolution. It forces us to articulate how a company “gets to” an attractive long-term valuation. Equally, it helps us identify companies where earnings power is structurally declining. In such cases, a stock may appear optically cheap on fiscal year one earnings but prove expensive on an FY6 basis if profitability is expected to erode over time. In some cases that journey is driven by earnings recovery. In others it is driven by sustained growth, disciplined cash generation, buybacks or asset monetization.

To impose analytical clarity, we classify opportunities into five primary types of value. Each describes a distinct way in which the market may be wrong and a different mechanism through which intrinsic value can emerge.

Classic value: The past is a guide to the future

Classic value reflects situations where share prices embed excessive pessimism due to cyclical pressures or temporary company-specific challenges. These are typically businesses where the underlying franchise remains intact, but earnings are depressed and the market assumes that current weakness will persist for an extended period or that profitability has reset to a structurally lower level. Our thesis rests on normalization. The key analytical task is distinguishing between temporary dislocation and genuine structural decline. If earnings revert toward historic or through-cycle levels and the business proves fundamentally sound, the mispricing closes.

Mispriced growth: The future will be better than the past

Mispriced growth arises when the market underestimates the duration, quality or scale of future growth. These companies may appear expensive on near-term metrics because current reported earnings understate the business’ forward earnings power and fail to capture the embedded growth in the franchise. The inflection may lie in margin expansion, market share gains or structural demand shifts. If growth persists longer or at higher returns than implied by consensus, valuation converges toward a higher intrinsic level. This category directly challenges the misconception that “growth” and “value” are opposites. A business can look expensive today yet be undervalued relative to its long-term earnings path.

Undervalued quality: A longer-term view is appropriate

Undervalued quality describes businesses where pricing power, competitive advantage and management discipline are not fully reflected in the share price. The market may acknowledge that the company is high quality yet still underestimate the longevity of its returns or the resilience of its cash flows across different environments. In these cases, the longer the horizon over which the business can be assessed with confidence, the greater the potential gap between intrinsic value and current price.

Discounted cashflow: Cash generation is key

Discounted cash flow investments are defined by the strength and visibility of free cash generation. The market may undervalue the quantum or duration of that cash flow, particularly when earnings growth appears modest. Value creation may come through capital returns, reinvestment at attractive rates or balance sheet improvement. A buyback, for example, can materially increase per-share value even in a low-growth environment. Here, the path to an attractive FY6 valuation is driven by compounding cash on a per-share basis.

Discounted assets: Unlocking of asset value drives thesis

Discounted assets are cases where the market price is below a reasonable assessment of sum-of-the-parts value. The business may own real estate, intellectual property or distinct divisions whose combined value exceeds the consolidated market capitalization. The investment thesis often includes a catalyst, such as restructuring or asset sales, that unlocks that embedded value.

A single company may exhibit more than one of these characteristics. However, disciplined classification requires identifying which mechanism is most central to the investment case and share-price evolution. That exercise clarifies what must happen for the thesis to work and what risks would invalidate it.

From a portfolio perspective, we believe this framework broadens the opportunity set and reduces concentration in a single narrative. Classic value ideas tend to be more sensitive to economic recovery and mean reversion. Mispriced growth depends on sustained operational inflection. Quality franchises often demonstrate resilience in volatile environments. Discounted cash flow cases may respond to capital allocation discipline and discount-rate dynamics. Asset-driven ideas hinge on realization events. In our opinion, diversifying across these drivers creates a portfolio with multiple, differentiated sources of return.

The central point remains straightforward. Value is not a short-term, low-multiple strategy. It is the disciplined identification of businesses whose medium-term intrinsic value exceeds their current price, recognizing that markets can misprice risk, growth, durability, cash generation or assets. By adopting a structured classification framework and maintaining a longer-term valuation lens, we seek to capture value wherever it arises rather than confining ourselves to stylistic labels.