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Use The Life-Cycle Framework To Improve Stock Selection

Bartley Madden profile picture
Bartley Madden


  • Firms experience a life cycle of profitability and growth. Financial data can be used to pinpoint a firm's current life-cycle position and help analyze management's strategy and resource allocation decisions.
  • A firm's % Future--the market-implied value of future investments relative to total firm value--often reveals a likely future for a firm quite different from its past.
  • Top and bottom life-cycle performers are listed based on % Future and CFROI (cash-flow-return-on-investment).
  • A link is provided to access life-cycle data for 1,000 industrial firms in order to identify their current life-cycle positions.

By way of background, my early research at Callard, Madden & Associates led to the development of the CFROI (cash-flow-return-on-investment) life-cycle valuation framework and this was documented in my 1999 book, CFROI Valuation, and further expanded with my 2016 book, Value Creation Thinking. The original goal was to implement a total system approach to valuation in which the estimation of the investors' discount rate was dependent upon the procedures used to forecast firms' net cash receipt streams. Key implementation principles included: (1) the use of economic returns (CFROIs) and reinvestment rates (life-cycle variables) to forecast firms' future net cash receipts, (2) all data inflation adjusted (real) and CFROIs adjusted for myriad accounting biases, (3) forward-looking, market-derived investors' discount rate based on a monitored universe of companies, (4) investor expectations decoded from current stock prices and expressed as future CFROIs and reinvestment rates.

This was a major effort and was well received by large money management organizations who were aware of the pitfalls of using unadjusted accounting data and the lack of comparability across time, across companies, and across national borders. The work was continued by HOLT Value Associates, which was acquired by Credit Suisse in 2002. Today, the Credit Suisse HOLT global database covers 20,000 companies and is a part of the investment process at many money management organizations worldwide.

How can this research program benefit individual investors? Duplicating the technical database adjustments and extensive valuation calculations is not feasible. I suggest you do what I do in analyzing companies with a life-cycle thinking template. The core idea is to pinpoint where a firm is on its life cycle and then scrutinize corporate communications to either confirm or disconfirm that management "gets it" as to what is needed to create significant shareholder value.

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This article was written by

Bartley Madden profile picture
Bartley J. Madden retired as a managing director of Credit Suisse HOLT after a career in investment research and money management that included the founding of Callard Madden Associates. His early research led to the development of the CFROI valuation framework used today by money management firms worldwide. His website is http://www.LearningWhatWorks.com.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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