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Easton views the index framework as a simple and practical way to “size up” an industry prior to more detailed company specific analysis. We emphasize that use of the Easton Index is as a beginning point, not an investment fund proposition, to proceed on one of two paths:

• Corporations, who ordinarily take a longer view, will be interested in plumbing in more detail the value of particular strategic positions whether to judge acquisition value or confirm their own organic growth direction.
• Investment firms, more attuned to searching for undervalued situations, will likely use the index as an early indicator of when the markets are swinging to interest to revenue growth and away from earnings stability or cash flow…or the opposite.

Investors will also be interested in when the index is signaling some company stocks may be being undervalued in the market for whatever reason. At present, for example, several of the companies in the moderate “positional” and superior “performance” categories appear undervalued. Investors (or acquirers) will find:

• Stocks of firms with high performance KSCA ratings and low positional ratings behaved more like bonds.
• Strong KSCA ratings “set the table” for firms to deliver superior performance achieved through a pickup in revenue growth due either to internal development or acquisition.
• High revenue growth firms were sometimes guilty of “profitless growth”; in some market cycles shareholders were saved through acquisition at high prices.
• There is increased M&A activity in these moderate growth industries, but many of the acquired companies have weak KSCA advantages. This has proved problematic in the information industry in the past and the software industry is equally susceptible.

To see the portfolio results or the positional and performance ratings of individual firms in the portfolios, go to either the Easton Information Index or Easton Software Index.


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