Expectations Investing

Expectations investing rests on two simple ideas: First, you can read

stock prices and estimate the expectations that they imply. Second, you

will earn superior returns only if you correctly anticipate revisions in

those price-implied expectations.

The market values stocks using the discounted cash-flow model, and

so we’ll use it to read expectations. The familiar operating value driv-

ers—sales growth, operating profit margin, and investment—express

price-implied expectations.

But now we turn our attention to expectations revisions. In this

chapter, we deal with two fundamental questions:

1. Where should we look for expectations revisions?

2. Are all expectations ...