Investors often conflate the terms “value” and “valuation,” but the distinction between the two makes all the difference. This according to a recent article in Barron’s.

The article cites comments from Rafe Resendes, co-manager of the Applied Finance Select Fund, who says that this confluence of terms is one of his personal investment peeves. He explains that identifying stocks that are trading below their intrinsic value is the key to investing. As a sector-neutral fund, Applied Finance uses quantitative factors such as intrinsic-value rankings to buy their stocks. With an average return of more than 16.7% a year for the past three years, the fund has performed better than 96% of their peers.

In contrast to intrinsic-value rankings, most quantitative-value models fail to take into account the relationship between investments such as research and development, according to the article/Resendes. Despite its high price, he believes Facebook is still a “screaming value” and “priced as if it will have negative 5% sales growth going forward [and] they haven’t even begun to monetize WhatsApp and Oculus.”

Applied Finance’s goal has always been to answer the questions, “What’s a firm’s economic performance, and what is the firm worth?” says Resendes, who believes that a key input of intrinsic-value ranking is economic margin. In other words, is management creating value in a stock, or destroying it—and to what degree?

In general, Resendes thinks the market is not as pricey as many investors believe. The intrinsic value of each stock—while trending toward expensive—doesn’t warrant drastic portfolio changes.

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