Actively Speaking Podcast

Value Stocks, AI and the Intangibles

Jul 15, 2025
Justin Howell, the lead portfolio manager of TD Epic's U.S. value team, shares valuable insights on value investing and the nuances of intangible assets. He discusses how GAAP accounting often undervalues companies rich in intangibles like software and branding. Howell also explains the evolving metrics for valuation, emphasizing free cash flow and ROIC over traditional measures. Additionally, he highlights the impact of AI on business models, using mega-cap firms like Amazon and Netflix as examples of successful high-multiple investments.
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INSIGHT

GAAP Penalizes Intangible Investment

  • GAAP accounting favors tangible assets while understating intangible investments like software and brands.
  • This creates an apples-to-oranges comparison that penalizes modern tech firms on earnings and book value.
ADVICE

Value Free Cash Flow Over GAAP Metrics

  • Focus on free cash flow metrics instead of GAAP earnings or price-to-book when valuing modern companies.
  • Use free cash flow yield and return on invested capital to compare tangible and intangible firms more fairly.
ADVICE

Prioritize ROIC And Capital Allocation

  • Assess business quality via return on invested capital and management's capital allocation.
  • Prefer high-ROIC companies because they need to reinvest less to grow, freeing cash for shareholder returns.
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