Expectations Investing

Expectations Investing offers a unique and powerful alternative for identifying value-price gaps. Rappaport and Mauboussin provide everything the reader needs to utilize the discounted cash flow model successfully. And they add an important twist: they suggest that rather than forecasting cash flows, investors should begin by estimating the expectations embedded in a company's stock price. An investor who has a fix on the market's expectations can then assess the likelihood of expectations revisions. To help investors anticipate such revisions, Rappaport and Mauboussin introduce an "expectations infrastructure" framework for tracing the process of value creation from the basic economic forces that shape a company's performance to the resulting impact on sales, costs, and investment.

Investors who use Expectations Investing will have a fundamentally new way to evaluate all stocks, setting them on the path to success. Managers will be able to use the book to devise, adjust, and communicate their company's strategy in light of shareholder expectations.

Contents

Greater Expectations: How Investing Differs from Art Collecting (Peter L. Bernstein)

Preface

Acknowledgments

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 I 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 Analysis

Historical Analysis

Competitive Strategy Frameworks

Essential Ideas

Part II 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 III 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

About the Authors

Forum at the Sante Fe Institute