| High Pointe has developed a more complete stock valuation model than standard industry models.
High Pointe's investment process was developed on the central premise that as the U.S. economy made its transition from the manufacturing era to the information era, more and more of the value of companies was going to shift to intangible assets such patents, brands, network effect, reputation, employee satisfaction, etc. rather than physical assets such as plant and equipment and inventory. This insight led the firm to create a metric called the Franchise Quality Score to measure a company's intangible assets and use it as a key component of selecting stocks for the firm's value-oriented investment strategy.
The Franchise Quality Score is calculated by assigning a value to eight component factors on a scale of 1 to 5. The eight components are designed to answer two all-encompassing questions:
• How good is the business?
• How well is it being managed for long-term success?
The eight components of the Franchise Quality Score are listed below
• Barriers to Entry
• Degree of Competition
• Pricing Power vs. Customers
• Pricing Power vs. Suppliers
• Engagement with Employees, Community and Government
• Sustainability of Competitive Advantage
High Pointe derives the composite Franchise Quality Score derived from this framework and uses it as an independent variable in a regression model that uses valuation, quality and growth factors to identify undervalued stocks.