Beyond Earnings

11EVALUATING MARKET EXPECTATIONS

“Stock prices are the clearest and most reliable signal of the market’s expectations about a company’s future performance.”

—Alfred Rappaport and Michael J. Mauboussin, Expectations Investing

“It’s a fun game. It never goes away.”

—Bob Hendricks

KEY LEARNING POINTS

• The goal of value investors is to find stocks that can beat market expectations.
• Stocks with high expectations where profitability and growth are priced to increase dramatically tend to underperform.
• Stocks with low expectations where profitability is priced to crater tend to outperform, and might be good trades.
• Stocks that derive more than 40% of total value from expected growth opportunities are frequently lackluster investments.
• Before building a complex financial forecasting and valuation model for a company, try to back into its market‐implied expectations. This is easy to do with HOLT Lens. The back‐of‐the‐envelope pricing equations we derived in earlier chapters will prove useful.
• We provide tips on what to be aware of when considering HOLT’s default valuations.

THE RELATIVE WEALTH CHART AS A DECISION AID FOR EFFICIENTLY ASSESSING STOCK OPPORTUNITIES

The rewards for anticipating the next Apple, Tesla, or Facebook will undoubtedly be large. Investors are motivated to find these winners, but how can they accomplish this aim? Is there a better way to find potential winners than by listening to the gossip about equity markets at the nearest watering hole or reading investment ...