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Description of Expectations Investing

About 75 percent of active investors consistently deliver returns below those of passive index funds. Why? In part, it's because proven methods for valuing assets are too complex to apply-causing investors to rely on commonly used benchmarks such as current earnings and price-earnings multiples that simply don't reflect how the market prices stocks.

Now, leading valuation experts Alfred Rappaport and Michael J. Mauboussin argue that the secret to beating the market stands in plain sight. Embedded in the stock price - the most accessible piece of information in the investment arena - lies all investors need to know about how the market expects a company to perform. By correctly decoding that information, say the authors, investors are on the way to anticipating changes in a company's competitive position that the current stock price doesn't reflect - and making informed buy, hold, or sell decisions before the rest of the crowd. This proven approach, expectations investing, holds the potential to change the rules and improve the odds of the stock selection game forever.

The beauty of expectations investing is that it harnesses the power of the market's own tried-and-true pricing model-discounted cash flow-without requiring difficult and often dubious long-term forecasting. Highly practical, the book provides a strategic framework and corresponding tools for using price-implied expectations (PIE) to:

- Interpret current prices and anticipate revisions in expectations
- Monitor signals from managerial actions such as mergers and acquisitions and share buybacks and estimate their impact on shareholder value
- and, Devise, adjust, and communicate management strategy in light of shareholder expectations.

In addition, a unique expectations infrastructure helps track value creation from the initial triggers that shape performance to the resulting impact on sales, operating profit margins, and investment efficiency. Universally applicable to public companies across the economic landscape, "Expectations Investing" will enable professional investors, analysts, and executives to translate heightened uncertainty into lucrative opportunity.

Title Information

ISBN:

9781578512522

Pages:

368 pages

Format:

Hardback

Product Code:

13729

Publisher:

McGraw-Hill

Published:

01/09/2001

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About Alfred Rappaport and Michael J Mauboussin

Alfred Rappaport is the Leonard Spacek Professor Emeritus at Northwestern's Kellogg School and is Shareholder Value Adviser to L.E.K. Consulting. He originated the Shareholder Scoreboard for the Wall Street Journal.

Contents of Expectations Investing

1. The Case for Expectations Investing
Active Management: Challenge and Opportunity
The Expectations Investing Process
The Twilight of Traditional Analysis
Essential Ideas
Appendix: Earnings Growth and Value Creation


PART 1. Gathering the Tools

2. How the Market Values Stocks
The Right Expectations
Shareholder Value Road Map
Free Cash Flow
Cost of Capital
Forecast Period
From Corporate Value to Shareholder Value
Summary Illustration
Essential Ideas
Appendix: Estimating Residual Value
The Perpetuity Method
The Perpetuity-with-Inflation Method

3. The Expectations Infrastructure
The Expectations Infrastructure
Not All Expectations Revisions Are Equal
Essential Ideas

4. Analyzing Competitive Strategy
The Dual Uses of Competitive Strategy
Historical Analysis
Competitive Strategy Frameworks
Essential Ideas


PART 2. Implementing the Process

5. How to Estimate Price-Implied Expectations
Reading Expectations
Gateway Case Study
Why Revisit Expectations?
Essential Ideas
Appendix: Employee Stock Options and Expectations Investing
Valuing ESOs

6. Identifying Expectations Opportunities
Searching for Expectations Opportunities
Pitfalls to Avoid
Gateway Case Study
Essential Ideas

7. Buy, Sell, or Hold?
Expected-Value Analysis
Gateway Case Study
The Buy Decision
The Sell Decision
The Role of Taxes
Essential Ideas

8. Beyond Discounted Cash Flow
Real Options
When to Use Real-Options Analysis in Expectations Investing
The Value of Real options in Amazon.com
Reflexivity
Essential Ideas

9. Across the Economic Landscape
Business Categories
Business Categories and the Value Factors
Essential Ideas


PART 3. Reading Corporate Signals

10. Mergers and Acquisitions
How Acquiring Companies Add Value
Evaluating Synergies
What to Do When a Deal Is Announced
Essential Ideas

11. Share Buybacks
The Golden Rule of Share Buybacks
Four Popular Motivations for Share Buybacks
Essential Ideas

12. Incentive Compensation
CEO and Other Corporate-Level Executives
Operating-Unit Executives
Middle Managers and Frontline Employees
Essential Ideas

Notes
Index