The EVA Revolution Revisited: A Return to the Fundamentals of Wealth Creation

Abstract

The author proposes that the Economic Value Added (EVA) Revolution of the past is still the EVA of the present regarding the fundamentals of wealth creation and destruction. As such, the economic profit approach to securities analysis and portfolio management is a robust framework for making sell-side recommendations and buy-side decisions. EVA style analysis has been shown to generate abnormal returns (alpha) on corporate actions such as acquisitions, share repurchases (buybacks), stock splits, and dividend announcements. In turn, EVA style dynamics present investors with another potential opportunity to earn alpha or risk-adjusted returns. The author concludes that investor portfolios are not all passive or all active, but they are a mix of passive–active strategies. EVA style with its focus on the financial characteristics of value creators and destroyers is recommended as the bottom-up, fundamental component of the active strategy.