Valuation of Companies using Reverse DCF

Using Historical and Projected Free Cash Flows to determine right prices for equities.

The Reverse DCF approach takes the view that current Stock Price capture expectations of performance of a stock. Reverse DCF or Price Implied Expectations breaks down the expectations into measurables variables such as Growth Rates, Investment Rates and Free Cash Flows. By comparing actual performance of the company against the expectations embedded/implied in the stock price, its possible to identify opportunities to buy and sell stocks at the right prices. The approach is detailed in the book Expectations Investing by Michael Mauboussin and Alfred Rappaport. The companion website Expectations Investing provides additional readings and the detailed model which incroporates Real Options and M&A

In the current model, we see industry level growth rates and margin metrics which provide additional infomation to determine future expectations. Additionally, Research and Development and Sales and Marketing expeses are capitalized to provide a better guage of actual investments.