Expectations Investing Question

I have read the book Expectations Investing by Michael Mauboussin and Alfred Rappaport. Very interesting book overall but I have a few questions. Anyone able to offer some thought?

My questions are around using the stock price and various estimated variables (sales growth rate, operating margin etc) to work out the “market implied forecast period” - the number of years free cash flows the market thinks are required to justify the stock price (also called the “value growth duration” or “competitive advantage period”). My understanding is that this is the period that the market expects a company to generate returns on its incremental investments that exceed it’s cost of capital. Post this period, “any additional investments a company makes will earn the cost of capital and consequently add no further value.”

My questions are how to interpret the “market implied forecast period”. Presumably the longer it is the better it is as it indicates that the market expects the company to have a long period of time when it has a competitive advantage. By contrast, a shorter period is bad news as the market presumably doesn’t expect the competitive advantage to last long and hence growth also not to last long. Q1 is would this be the right way of looking at this?

Q2 (and apologies this is long winded) - is author’s say that the market implied forecast period clusters between 5 and 15 years but can range from zero to 30 years. I am looking for some form of benchmark to evaluate against. Does anyone know of any data that would be useful in this regard? Industry medians? Whilst I write this I am also thinking of emailing the authors directly

Any thoughts or opinions on the above valued. Cheers!

In my analysis, it’s the trend in…

  1. Net operational cash flow per share, where net operational cash flow = operational cash flow minus any preferred stock dividends and minus any distributions to non-controlling interests.

  2. Revenue per share

  3. Common dividend to net operational cash flow.

  4. Interest expense per operational cash flow + interest expense

  5. Net operational cash flow - to - Cash flow for investments

  6. Common dividend to net operational cash flow payout ratio.

The trend lines on these are the best predictors on how the company will fare in the quarters ahead.