Valuation 101: Buy low expectations and sell/short abnormally high expectations.
This strategy is based on the principle:
The value of an asset equals the present value of the future cash flows available to the owner(s) of the asset.
There are two ways to measure the PV of future cash flows:
- Intrinsic value approach: enter your forecast into a DCF model and determine your target price
- Expectations quantification approach: reverse engineer the future cash flows required to justify the market price.
New Constructs prefers option #2 because it relieves investors of the burden of predicting the future. We'd rather be a critic of a fortune teller than a fortune teller.
We use our reverse dynamic discounted cash flow model to quantify the future cash flow expectations in every stock we cover. Then, we assess those expectations for reasonableness.
We are less interested in market expectations that are reasonable. We focus on the extremely high and low expectations: Buy low expectations and sell/short abnormally high expectations. More details in Investment Strategy 101.
That is the best way to make money in the stock market over any meaningful amount of time.
See a four step example of how to value a company by heading here.