ValuFocus Investing: A Cash-Loving Contrarian Way to Invest in Stocks

ValuFocus Investing: A Cash-Loving Contrarian Way to Invest in Stocks

by Rawley Thomas, William F. Mahoney
Released October 2012
Publisher(s): Wiley
ISBN: 9781118250075

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Book description

A must-read book for investors who prefer to pick stocks based on cash flow facts, not on media hype and fiction

How to Pick a Stock is written for the contrarian investor who wants an investing method that is based on cash flow facts, not on media hype and speculative impulse. This book combines an accessible presentation of a contrarian investment model and the ValuFocus tool that offers a highly studious, detailed explanation of understanding a company's true intrinsic value.

If you can calculate a company's intrinsic value on the basis of knowing if the market is currently under, fairly, or over pricing its stock, then it is possible to invest wisely in the stock market. Investors who want to buy undervalued stocks, or sell (short) overvalued ones will find this book immensely useful. The ValuFocus investing tool calculates the intrinsic value of every company in their database automatically. Thus, an individual investor can become an "A" student of a modeling process, or can go right ahead in using this tool to pick stocks and manage their own portfolio. Additionally, this book helps to develop an enhanced framework to fundamental equity valuation.

  • Contains the ValuFocus tool for calculating the intrinsic value of every company in the LCRT Nucleus database

  • Offers specific and innovative valuation techniques of practicing professionals for individuals to use in picking stocks long-term

  • Highlights the most state-of-the-art approaches to unconventional stock-picking for investors and corporate finance professionals

Offering encouragement to individual investors by outlining a model that delivers satisfying returns, How to Pick a Stock is especially useful for those who are patient and believe in longer-term investing horizons.

Table of contents

  1. Cover
  2. Series Page
  3. Title Page
  4. Copyright
  5. Dedication
  6. Preface
  7. Acknowledgments
    1. Rawley Thomas
    2. Bill Mahoney
  8. Section One: The LCRT Investment Process
    1. Chapter 1: Introducing Our Investment Process
      1. Key Takeaways
    2. Chapter 2: A Better Way to Invest in Stocks
      1. Put the Focus in the Right Place: On a Company's Fundamental Value
      2. We Bring You an Improved Methodology
      3. Basing Decisions on Under- and Overvaluation by the Market
      4. The Key: Recognizing the Inflection Points
      5. Looking at Our Model
      6. Key Takeaways
    3. Chapter 3: Advantages of Economic, Cash-Based Modeling
      1. Key Takeaway
    4. Chapter 4: Analyzing Mental Models
      1. Key Takeaways
    5. Chapter 5: The Value Creation Process
      1. Cost of Capital and Company Return on Capital
      2. The Importance of Adjusting for Inflation
      3. Where We Are Going
      4. Key Takeaways
    6. Chapter 6: The Corporate Perspective
      1. The Focus for Both Constituencies: Value Creation
      2. Earnings Are the Wrong Measure
      3. Executive Compensation
      4. Creating an Information Advantage
      5. Key Takeaways
  9. Section Two: A Brief History of Investing and Modeling
    1. Chapter 7: Relevant Market History of Investing
      1. Start with Concepts of Risk and Uncertainty
      2. Migrate toward Value and Market Inefficiency
      3. Enter Modern Portfolio Theory
      4. An Emphasis on Earnings, Plus
      5. Leading to Multifactor Modeling
      6. Finding the Right Factors
      7. Dissecting a Multifactor Model
      8. Key Takeaways
    2. Chapter 8: Interpreting Market History
      1. Market is Dealing with Price Change, Not Price Level
      2. Bringing History Up to Now
      3. Back to Earnings: Why They Still Prevail
      4. Key Takeaways
  10. Section Three: Brief Discussions of Various Investing Methods
    1. Chapter 9: Do Stocks Have Intrinsic Value?
      1. Basing Investment Decision on Intrinsic Value
      2. Value Assets on Economic Basis
      3. Estimating Intrinsic Value through a DCF Model
      4. Key Takeaways
    2. Chapter 10: The Pros and Cons of Various Methods and Models
      1. Why Price Level Matters
      2. Why Use Analysts' Traditional Cash Flow Forecasts. Why Not.
      3. Why Use Dividends to Value Stocks. Why Not.
      4. Why Use the Simplest Model, EBITDA. Why Not.
      5. Why Use Earnings. Why Not.
      6. Why Use Price Level from Regression Analysis. Why Not.
      7. Why Use Net Free Cash Flow. Why Not.
      8. Why Use Residual Income or EVA.® Why Not.
      9. Why Use Cash Flow ROI, CFROI,® Economic Cash Margin, or Cash Economic Return. Why Not.
    3. Chapter 11: Suppose You Love Your Current DCF Model
      1. Dividend Discount Models
      2. EVA® or Residual Income Models
      3. CFROI® or Cash Economic Return Models
      4. Regression Models of Price Level
      5. Multifactor Models
  11. Section Four: Explaining LCRT's Conceptual Framework in Detail
    1. Chapter 12: Our Approach
      1. Differences between Intrinsic Value and Market Value Approaches
      2. Explaining Value
      3. Attacking the Old Ways
      4. Modeling on Economic Fundamentals, Not Accounting Mumbo-Jumbo
      5. The Intricacies of the Price Formation Process
      6. The Foundation is Intrinsic Value
      7. We're Fighting Standard Practices, but We Can Win
      8. Key Takeaways
    2. Chapter 13: Focusing on Price Formation
      1. Be Proactive, Not Reactive
      2. Building a Price Formation Process
      3. Oh-Oh: We're Preaching Again
      4. Key Takeaways
    3. Chapter 14: Our Automated DCF Model—The Better Model
      1. Four Primary Measurement Principles to Evaluate a Model
      2. Key Takeaways
    4. Chapter 15: Getting to Know Our LCRT Model
      1. Adjustments to Improve DCF Modeling
      2. Economic Output and Life of Each Asset
      3. Capitalize Cash Flows
      4. Understanding Abnormal Accruals
      5. Cash Flows Fade: Down and Up
      6. Looking at the Discount Rate
      7. Summarizing the Model of Choice
      8. The Next Generation Will Be Even Better
      9. Key Takeaways
    5. Chapter 16: Digging Deeper into the LCRT Model
      1. Exponential Fading of both Cash Economic Return and Growth Rate
      2. Certainty-Equivalent Value and the Use of the Area under a Curve
      3. Dealing with Debt Leverage
      4. Looking at the Discount Rate Again
      5. Inflation Adjustments Revisited
      6. Importance of Accuracy
      7. Calculating Bounded Rationality (Rawley Ranges6)
      8. Market Sentiment and Micro and Macro Economic Drivers
      9. Improving the Model with Your Insights and Analyst Forecasting
      10. Key Takeaways
    6. Chapter 17: Putting Our Valuation Proposition into Perspective
  12. Section Five: How to Make Investment Decisions with ValuFocus
    1. Chapter 18: ValuFocus—The Key Tool for Investing in Stocks
      1. The Components of ValuFocus
      2. The Relative Wealth Chart: Cash Economic Return, Growth, and Stock Performance
      3. Rawley Ranges of Bounded Rationality
      4. EPS and Sales Overrides
      5. Analyzing Hewlett-Packard
      6. Determining the Accuracy of the Value Calculations
      7. Using the Value Chart
      8. Earnings Results Can Be Misleading
      9. The Market Often is Slow to React to Value Improvements by Management
      10. Picking the Right Model Version
      11. Contrasting Hewlett-Packard with Coca-Cola
      12. Neither Coke nor Pepsi
      13. Incorporating Revenue and EPS Forecasts
      14. Basic Purpose: Predict Future Stock Price
      15. Taking Advantage of the Flexibility of ValuFocus
      16. The Importance of Fade Rates to Intrinsic Valuation
      17. Continuing Debate: Determining the Right Discount Rate Created from Long-Term Growth Rates
      18. Key Takeaways
    2. Chapter 19: Managing Your Stock Portfolio
      1. Ways to Weight Stocks in Your Portfolio
      2. Risk and Concentration
      3. Rebalancing Your Portfolio
      4. Key Takeaways
    3. Chapter 20: Advanced Portfolio Concepts
      1. Selecting Stocks
      2. Portfolio Weighting
      3. Achieving Low Risk–High Return Trading around a Core Portfolio
      4. Shorting Stocks Based on Value
      5. Cash Generator
      6. Key Takeaways
    4. Chapter 21: What If You Don't Want to Employ ValuFocus
    5. Chapter 22: Always Going Forward
      1. Key Takeaways
    6. Chapter 23: It Is Time to Get Started
  13. Section Six: Advanced Topics for Practicing Professionals
    1. Chapter 24: Security Analysis and Modeling
      1. Empirically Test Terminal Valuation Model against History
      2. Benefits and Rewards
      3. Analyst Dashboard
      4. Financial Modelers and Ideas for Future Practitioner Research
      5. Key Takeaways
    2. Chapter 25: Wealth Management
      1. Key Takeaway
    3. Chapter 26: Portfolio Construction
      1. New Theory
      2. Begin with Under- and Overvaluation, Then Diversify
      3. Weighting Schemes
      4. Rebalancing Your Portfolio
      5. Benefits of Concentration
      6. Key Takeaway
  14. Section Seven: Advanced Topics for Academics
    1. Chapter 27: Another Tour through Our LCRT Model
      1. Description of the LCRT Model
      2. Constructing the Model
      3. Basic Components of the Model
      4. Dealing with the Many Assumptions
      5. The Best of Both: Explaining Our Fade Process in a Single-Period Method
      6. Fade and Model Accuracy
      7. Starting with a Baseline Model
      8. Importance of Understanding Economic Comparables
      9. The Difference between Net Free Cash Flow versus Cash Economic Return
      10. Comparing Conventional and LCRT Models
      11. Validating the Model: The Proof is in the Comparison
      12. Calculation of Tracking Errors
      13. Focusing on Cash Economic Return
      14. Calculating and Delving into Cash Economic Return
      15. Understanding the Growth Rate
      16. Arriving at the Discount Rate for a Third Time
      17. Summing Up
      18. Key Takeaways
    2. Chapter 28: Incorporating Risk into Our Model
      1. Incorporating Risk and Fade into Our LCRT Model
      2. How Risk Modeling for Stock Selection Has Evolved
      3. Managing Risk in Our LCRT Modeling
      4. Looking at Technical Analysis and Ranges of Bounded Rationality Again
      5. Measuring the Extent of Over- and Undervaluation
      6. Modeling the Dispersion of Stock Price
      7. Applying Risk in Our Model
      8. Key Takeaways
    3. Chapter 29: Producing Lower Fat-Tailed Risk with Higher Returns
      1. Alternatives to Stable Paretian Distributions
      2. Comparison of Traditional Gaussian Measures with Stable Paretian
      3. Key Takeaways
    4. Chapter 30: Comparing Our Model against Three Popular DDMs
      1. Evaluating the Three DDMs
      2. Testing the Models for Robustness and Accuracy
      3. Robustness, Accuracy, Nonbias Enhance Predictability
      4. Removing Bias Caused by a Certain Parameter
      5. Portfolio Results for Three ROPE Model Specifications
      6. Using Our Sophisticated Free Cash Flow Process
      7. Key Takeaways
    5. Chapter 31: Suggestions for Additional Academic Research
  15. Epilogue—Key Takeaways
  16. About the Authors
    1. Rawley Thomas
    2. William F. Mahoney
  17. Index

Product information

  • Title: ValuFocus Investing: A Cash-Loving Contrarian Way to Invest in Stocks
  • Author(s): Rawley Thomas, William F. Mahoney
  • Release date: October 2012
  • Publisher(s): Wiley
  • ISBN: 9781118250075