In @HowardMarksBook's memo early this year, one key thing I realized is how wrong I was to dismiss some businesses because I thought they were overvalued simply after looking at the P/E, P/S ratio etc.

1/ @mjmauboussin's book Expectations Investing is a masterclass in valuation & strategy

His framework uses price-implied expectations to assess companies, an elegant way to invert valuation

https://t.co/kESplMN3nW

To practice these concepts, I wrote a case study on Chipotle⤵️

2/ Chipotle is the leading fast casual restaurant chain across the US, with almost 3,000 owned & operated locations

They benefit from strong unit economics and a trusted brand

We'll discuss consensus estimates, competitive landscape, and expected

3/ We must first identify the price-implied expectations based on key value drivers

After finding the consensus estimates, investors can seek opportunities in the expectations - looking for a divergence from the market's assumptions

Let's start with Chipotle's sales growth

4/ Chipotle has grown revenues from $3.9B to $7.55B over the past 5 years, at a 5 year CAGR of 14.1%

Analysts estimate a 13.7% consensus growth rate based on 5-7% same store sales growth, 8% additional store openings per year, and steady digital sales contribution

5/ Next is operating profit margin, which measures profitability from core operations

Chipotle has slowly been growing its margin, now at 10.67%

Analysts expect high margins of 15.75%, with incremental profits from digital orders and unit-level margin growth contributing

"An Introduction to Valuation" by Aswath Damodaran is an excellent doc for learning more about Valuation, differences between Intrinsic Value (DCF) and Relative Valuations (their basics, Pros/Cons, when they work better...).

cc: @dmuthuk

Some of my fav slides from the presentation.

✔️Misconceptions about and approaches to Valuation.

A word of advice and caution. When you buy a High Pe stock. Make sure that you are very certain about the growth. Plenty of good and bad examples

Eicher=Growth stopped, Got derated.

Pi Industries= At 52+Pe in 2015, growth continued (5bagger since then)

Symphony=Growth stopped as more competitors copied them, painful time correction.

Astral=Kept growing and entering newer adjacencies since 2015 when it was at 60+ Pe. (Been a 10 bagger since then)

Page Industries=Growth stopped as the company matured. No returns for last 4 yrs.

Bajaj Finance= Kept growing (barring Pandemic). Kept rerating with the earnings growth.

HDFC Life=Been absurdly valued since 2018. Leading to very poor returns.

Relaxo=Kept getting rerated on back of earnings growth.

High Pe means market is expecting strong earnings growth. What happens when it fails to come? Likely derating or painful time correction.

Paying a high multiple, you need to make sure that the growth is certain.

What I do to grasp such opportunities or to ignore them is to have a mix of deeply valued companies (like some financials I own) with Companies where I think they will grow at 30-35%+ (Navin).

This is what my framework is:-

Pf=High Pe+Already seen value+Strong earnings growth

@hindsightcapllp @mjmauboussin It still has some life, but will go extinct on the day you see "Adjusted Book Value" in Qtrly Con Calls :)