Expectations Investing: Reading Stock Prices for Better Returns

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. 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". Michael J. Mauboussin is a Managing Director and Chief U.S. Investment Strategist at Credit Suisse First Boston. He is also an Adjunct Professor at Columbia Business School. Visit the book's dedicated Web site at: our associated website.

Table of 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

About the Author :
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.