Recently I read through the newly released Expectations Investing edition and really enjoyed learning about the concept of a reverse DCF for an implied valuation based on current equity prices. I was wondering how often people working for hedge funds make use of this form of reverse DCF, if at all? If so, how granular do you make your models or do you make it as simple as possible without losing value?
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I have occasionally used it in the past. I find it helpful for high growth/high PE stocks just to see the expectations built in and whether we have a variant view. We try to keep in as simple as possible - we typically project the cash flows for the first 3 years, then for the next few years assume some simple growth rates.
Anyway I could DM & get your insights on things since you're actually workin in the space? Currently working on a stock pitch for a competition & im feeling the dichotomy of theory v practice , just seeking some guidance.
Thanks!
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Further than growth, you can also infer what is the cost of equity/what the market is asking, given that building Ke based on CAPM it's just theory.
Nobody uses it, mainly because nobody uses DCF. If the goal is to reverse engineer what earnings expectations the market is baking in, then you should approach it with the valuation method the market uses. And that’s overwhelmingly multiples, not DCF. So reverse multiple - sure. Never heard of reverse DCF except in Maboussin’s books.
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