PRVit (Stern Stewart)

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Rating Stocks and Investments. Explanation of Performance Risk and Valuation investment technology of Stern Stewart & Co. PRVit.



What is PRVit? Description

The PRVit system is a proprietary performance, risk, and valuation method from Stern Stewart.

It is a purely quantitative, EVA based stock rating and investment screening system. PRVit is derived from a cross-sectional and time series statistical analysis of the financial results of all Russell 3000 companies that is updated monthly. It compares a company with its sector peers and with the market universe in terms of its operating performance, risk, and key valuation multiples.

PRVit brings together the following three factors:

  • Performance
  • Risk
  • Valuation

and develops an overall index of investment timeliness. It does this by calculating a company's risk-adjusted performance potential per unit of valuation. Or in symbols: by taking its P score, subtracting its R score, and dividing the result by its V score.

Effectively, PRVit calculates an intrinsic MVA of a company in the numerator, based on its risk-adjusted potential to drive profitable EVA growth. And it divides that by a representation of its actual MVA in the denominator.

Stern Stewart PRVitIt compares the performance, risk and valuation compromises of each company with the market universe of such compromises to position a company on a relative valuation scale.

The resulting overall PRVit-score - which runs from 0 to 100 - indicates the company's relative attractiveness as compared to the Russell 3000. A PRVit score of 50 thus indicates a fair balance among all three factors, and a seeming parity between the firm's intrinsic value and its traded value, given current market conditions. A high score however - in the range of 67 to 100 - indicates that an investor can acquire a considerable amount of valuable performance potential for a reasonable valuation price, and thus the stock may have stored up the potential to outperform the market if past trends are sustained. A low score, say from 0 to 33, indicates that the company's market value is aggressive compared to past performance trends. Without a good reason to expect a significant reversal an investor should avoid buying these shares, because such companies are deemed likely to perform less than the overall market.

Calculation of PRVit. Formula

At the heart of PRVit are 12 indicators which were carefully selected, precisely computed and exhaustively tested. They collectively depict the essence of corporate performance, risk, and valuation. See the figure on the right.

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