Search For Opportuninties Like An Investor

Markets thrive on uncertainty, but most investors chase trends (meme stocks, AI mania, crypto) or cling to overpriced “safe” blue chips. Meanwhile, value investing—buying undervalued companies—has quietly outperformed for decades. The problem? Traditional metrics like the P/E ratio often miss hidden opportunities… or trap investors in “value graveyards.”

Enter The Acquirer’s Multiple, a formula popularized by investor Tobias Carlisle in his book The Acquirer’s Multiple: How the Billionaire Contrarians of Deep Value Beat the Market. Unlike conventional tools, this metric identifies companies trading far below their intrinsic value by focusing on two often-ignored factors: debt, cash and operating earnings.

Post-COVID markets have been a rollercoaster: inflation, rate hikes, and tech selloffs. Yet Carlisle’s research shows that portfolios built using the Acquirer’s Multiple crushed the S&P 500 by 3x in the decade following the 2008 crash. Could it repeat this performance post-2020? Early data suggests yes, but only if you avoid common pitfalls.

In this guide, we’ll break down:

• How the Acquirer’s Multiple works (and why it’s better than P/E ratios).
• Step-by-step rules to build your own portfolio.
• Analysing post-COVID performance data
• Tools to search for the Aquirer’s Multiple

Let’s begin.

What is the Acquirer’s Multiple? The Formula That Finds Bargains

The Acquirer’s Multiple (AM) is a simple but powerful metric designed to answer one question: “How cheap is this company relative to its true earnings power?”

AM -Formula

The Acquirer’s Multiple cuts through accounting noise and debt illusions to find companies trading at fire-sale prices. As Carlisle writes:

“The market is a pendulum. Fear knocks stocks down to irrational lows; greed pushes them to unsustainable highs. The Acquirer’s Multiple helps you buy when fear is greatest.”

Why the Acquirer’s Multiple Beats the P/E Ratio

The Price-to-Earnings (P/E) ratio has long been a go-to metric for investors, but it suffers from two critical flaws. First, it ignores debt. A company with a seemingly low P/E ratio might carry heavy liabilities—imagine a legacy automaker with a P/E of 10 but drowning in debt. This makes it a “value trap,” where apparent cheapness masks existential risk. Second, P/E relies on net income (the “E”), which can be distorted by one-time windfalls, tax gimmicks, or creative accounting. A company can artificially inflate earnings to look cheaper than it truly is.

The Acquirer’s Multiple sidesteps these pitfalls. By using Enterprise Value instead of market cap, AM forces investors to confront a company’s debt burden. A low EV/EBIT ratio signals a business priced like a bargain after accounting for leverage. Meanwhile, its focus on EBIT (operating earnings) strips out non-core factors like taxes and interest, revealing the true profitability of the underlying business.

Consider two companies:

• Company A: P/E = 10, EV/EBIT = 8 (moderate debt).
• Company B: P/E = 10, EV/EBIT = 15 (high debt).

The P/E ratio misleadingly suggests both are equally cheap. The AM, however, flags Company A as the better bargain—its EV/OE of 8x means you’re paying far less for each dollar of operating profit.

The “Billionaire” Rationale

In The Acquirer’s Multiple, Tobias Carlisle explains why this metric is favored by activist investors like Warren Buffett and Carl Icahn. Unlike passive shareholders, these corporate acquirers evaluate businesses as if buying them outright—factoring in debt, cash, and core earnings. The AM mirrors this mindset: a low multiple signals a margin of safety, where the stock trades far below its intrinsic value.

How the Acquirer’s Multiple Works: Mean Reversion, Moats, and the “Secret Sauce”

The Engine Behind the Strategy: Mean Reversion

In The Acquirer’s Multiple, Tobias Carlisle anchors the strategy in mean reversion, the idea that companies (and markets) tend to oscillate around long-term averages. Stocks trading at extreme lows often rebound as:

• Profitability stabilizes: Temporarily depressed earnings (e.g., due to cyclical downturns) recover.
• Sentiment shifts: Neglected stocks attract attention once fundamentals improve.
• Competitive equilibrium: Companies with unsustainably high profit margins attract rivals, driving margins back to industry averages. For example, a tech company like NVIDIA with 50% margins lures competitors into its market, sparking price wars that erode margins to 15%. Conversely, companies with crushed margins often see consolidation or cost-cutting that restores profitability.

This dynamic creates a pendulum: undervalued companies rise, overvalued ones fall. The AM exploits this by targeting stocks priced as if their depressed earnings are permanent when in reality, markets overshoot in both directions.

Moats Matter: Surviving the Storm

Not every cheap stock is a good buy. Carlisle emphasizes that companies with economic moats, durable competitive advantages like brand loyalty, patents, or low-cost production, are more likely to survive downturns and mean revert.

Example:

• No Moat: A generic retailer with a low AM but no pricing power. Competitors undercut it, leading to bankruptcy.
• Strong Moat: A pharmaceutical firm with a low AM but patented drugs. It survives the slump and rebounds when new drugs hit the market.

The “Secret Sauce”: Secondary Metrics

To filter out value traps, Carlisle pairs the AM with quality indicators like Return on Capital (ROC), Return on Equity (ROE) and Free-Cash-Flow-Yield (FCF-Yield). These ensure a company isn’t just cheap—it’s efficiently using its resources.

1. Return on Capital (ROC):ROC=ROC=
   • Why it matters: Measures how well a company generates profits from its core assets. A high ROC (>15%) signals operational efficiency.
   • Example: A manufacturer with 10MEBIT,10MEBIT,40M NWC, and 10MPPEhasanROCof2010MPPEhasanROCof2010M / $50M).
2. Return on Equity (ROE):ROE=Net IncomeTotal Stockholders’ EquityROE=Total Stockholders’ EquityNet Income​
   • Why it matters: Reveals how effectively management uses shareholder capital. ROE > 10% is ideal.
   • Example: A tech firm with 5Mnetincomeand5Mnetincomeand25M equity has an ROE of 20%.

Implementing the Acquirer’s Multiple: A Step-by-Step Guide

Step 1: Screen for Cheap Stocks

• Start by filtering for companies with the lowest Acquirer’s Multiple (AM). Carlisle’s research shows the cheapest decile (bottom 10%) historically delivers the best returns.
• Exclude financials and utilities: Their debt structures and regulations distort EV/EBIT.
• Market cap > $50M: Avoid illiquid micro-caps. However in his book Carlisle backtests three categories: $50M to $200M, $200M to $1B and companies bigger than $1B market cap. While on his Blog he emphasized this division here. https://acquirersmultiple.com/2016/06/a-guide-to-the-three-stock-universes-large-cap-1000-all-investable-and-small-and-micro-cap/#:~:text=Why%20use%20the,was%20%24150%20million. If we extrapolate the inflation beyond this we can use companies with a market cap starting at 250-300 million

Step 2: Filter for Quality

Not all cheap stocks are good buys. Use Carlisle’s secondary metrics to avoid value traps:

1. Return on Capital (ROC) > 0%:ROC=EBITNet Working Capital+PPEROC=Net Working Capital+PPEEBIT​Example: A retailer with 10MEBIT,10MEBIT,50M NWC, and 20MPPEhasanROCof14.320MPPEhasanROCof14.310M / $70M).Return on Capital esure the company efficiently uses capital to generate profits.
2. Return on Equity (ROE) > 0%:ROE=Net IncomeShareholders’ EquityROE=Shareholders’ EquityNet Income​Example: A software firm with 5Mnetincomeand5Mnetincomeand40M equity has an ROE of 12.5%. Return on Equity Signals management is creating value for shareholders.

Step 3: Build Your Portfolio

Carlisle’s rules for minimizing risk and maximizing returns:

• Equal-weight positions: Allocate the same amount to each stock.
• Diversify: Hold 30 stocks. If possible across different sectors to avoid concentration risk.
• Rebalance annually: Sell stocks after a one year holding period.