After showing how to read expectations, they provide a guide to rigorous strategic and financial analysis to help investors assess the likelihood of revisions. After showing how to read expectations, Mauboussin and Rappaport provide a guide to rigorous strategic and financial analysis to help investors assess the. This session puts it all together and uses those value drivers and determinants to explain the mechanics of the PIE analysis. We perform this analysis in. FOREX ADVERTISING BAN In read of all that and routine possible locally on remote issues. And are can grateful you I tell. Detailed creation you other Keep your teams a client.
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The three main triggers are sales, costs efficiencies, and investment efficiencies , and you can determine the influence that changes in each of these areas will have on the price of a stock by tinkering with them in your model. Investors should focus on the area with the largest expectations revision potential, which is usually sales. The way to anticipate changes in expectations is to foresee shifts in a company's competitive dynamics.
The author's recommend a few standard frameworks for analyzing a company's competitive strategy including:. It's also important for investors to analyze historical competitive strategy and financial performance, and to compare them with the future performance implied by the price. I'll give a brief overview of the chapter, but this is likely one you'll need to read for yourself, as this is where the authors dive into the nuts and bolts.
I'd also recommend hopping over to the expectations investing website , where you'll find the necessary resources including spreadsheets! These are essentially the key steps though:. The goal of investors is to take advantage of expectations mismatches. There are four building blocks that will help investors find these opportunities:.
Using these four building blocks, there are three steps to finding expectations opportunities:. Investors should also strive to mitigate the effects of behavioral traps such as overconfidence and anchoring. Always allow for a margin of safety, don't overestimate your abilities, challenge your estimates, and seek feedback from others. This chapter details how investors can value real options for future company projects, essentially using the Black-Scholes option pricing formula.
This is useful for valuing companies with very uncertain outcomes like start-ups, which traditional DCF analysis tends to undervalue. Remember to always consider the potential moves of competitors when valuing the real options of a company. The fundamental principles of economics have not changed , and we do not need new rules for value.
There are three main categories of businesses, physical, knowledge, and service, and they can each be understood through the lens of the value factors in the expectations infrastructure volume, price, mix, operating leverage, economies of scale, cost efficiencies, investment efficiencies. Understanding the characteristics of these categories can help investors anticipate expectations revisions.
For the acquiring company, this is equal to the present value of synergies less the premium paid. SVAR shows acquiring shareholders what percentage of their stock price they are betting on the acquisition. Investors can also gauge management's confidence in the deals by analyzing the consideration; typically all cash deals imply a higher confidence level because the acquiring shareholders take on all the synergy risk.
The choice between a cash and stock deal can also signal to investors if the management of the acquiring company thinks their stock is over or undervalued. Share buybacks can tell attentive investors a lot about a management team's view of a company. There are different reasons for share buybacks, some that send positive signals, and some that send negative ones. If management is buying back stock because they believe it is undervalued this is likely positive, conversely, if management is buying back stock because they ran out of investing opportunities, or they're trying to hit EPS targets, this is probably a negative sign.
This final chapter dives deep into employee compensation for upper management, operating executives, and middle management , and shows how paying close attention to incentives of management can help investors anticipate expectations revisions. The two questions investors should ask about employee incentives are :. The trade-off to keep in mind when evaluating a management team's measure and threshold level of compensation is that there is a trade-off between the strength of an incentive and losing an executive.
ValueResearcher's Blog Followers. Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors. Overview and Thoughts: Expectations Investing: by Michael Mauboussin and Alfred Rappaport , provides investors with a fantastic framework upon which to make critical investing decisions.
Part 1: Gathering the Tools Chapter 1: The Case For Expectations Investing The authors argue that investors can achieve superior returns by reading the expectations that are currently embedded in the price of a stock, and correctly anticipating revisions in those expectations through competitive strategy analysis, and by reading management signals.
Here are the three steps in the expectations investing process: Estimate price-implied expectations using a reverse DCF model Identify expectations opportunities where the company is most sensitive to revisions in expectations, ie. In order to understand what expectations are implied in a stock price, investors need to understand a few key concepts: How to get from a company's financial statements to free cash flow The time value of money and the relationship between discounting and compounding here's a cool visual from KeyDifferences.
Chapter 3: The Expectations Infrastructure In order to correctly anticipate revisions in expectations, investors need to understand the framework of what drives shareholder value. Chapter 4: Analyzing Competitive Strategy The way to anticipate changes in expectations is to foresee shifts in a company's competitive dynamics.