Expectations Investing

216 Pages·2001·2.258 MB·\216

by  Alfred Rappaport, Michael J. Mauboussin

expectations
investing
expectations
investing
reading stock prices
for better returns
ALFRED RAPPAPORT
MICHAEL J. MAUBOUSSIN
HARVARD BUSINESS SCHOOL PRESS
BOSTON, MASSACHUSETTS
Copyright 2001 Alfred Rappaport and Michael J. Mauboussin
All rights reserved
Printed in the United States of America
05 04 03 02 01 5 4 3 2 1
SVAR® and SSVA® are registered trademarks of L.E.K. Consulting LLC.
Requests for permission to use or reproduce material from this book should be directed to
[email protected], or mailed to Permissions, Harvard Business School Publishing, 60 Harvard
Way, Boston, Massachusetts 02163.
Library of Congress Cataloging-in-Publication Data
Rappaport, Alfred.
Expectations investing : reading stock prices for better returns / Alfred Rappaport, Michael J.
Mauboussin.
p. cm.
Includes bibliographical references and index.
ISBN 1-57851-252-2 (alk. paper)
1. Investment analysis. 2. Portfolio management. 3. Stocks—Prices. I. Mauboussin, Michael J.,
1964– II. Title.
HG4529 .R37 2000
332.63'2042—dc21
2001024378
The paper used in this publication meets the requirements of the American National Standard for
Permanence of Paper for Publications and Documents in Libraries and Archives Z39.48-1992.
To Sharon
To Michelle
contents
Greater Expectations: How Investing Differs from Art Collecting by
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