Invest
Competitive advantage period (CAP) — Part 3
By Level13  •  July 2, 2008
By: Level13 The CAP for the U.S. stock market, as a whole, is estimated to be between 10 and15 years. However, within that aggregate, individual company CAPs can vary from 0-2 years to over 20 years. As a general rule, companies with low multiples tend to have shorter CAPs. Alternatively, companies with high multiples typically have long CAPs. For example, companies like Microsoft and Coca-Cola have CAPs well in excess of 20 years, demonstrating their perceived market dominance, the sustainability of high returns, and the market’s willingness to take the long view. If a substantial percentage of the value of a company can be attributed to cash flows beyond a few years, it is difficult to argue persuasively that the market is short-term-oriented. In turn, it follows that the forecast periods used in most valuation models are not long enough. It may be more important for the investor to try to quantify CAP than to pass judgment on its correctness. As noted earlier, the components of value are all expectational, and therefore must be considered relative to one another and against the expectations for the business overall. There are a number of ways of estimating CAP, but one of the most useful methods was developed by Al Rappaport. The technique is known as market-implied CAP (MICAP). Determination of the MICAP has a few steps. Read more... Related Articles Competitive advantage period (CAP) — Part 1 Competitive advantage period (CAP) — Part 2
Read the full article
By Level13
Level13 is a 30 yr old guy who started investing about 4 years ago. He is a value investor who tries to buy a dollar note for eighty cents or less. Level13 Investor Creed "Do not believe in anything simply because you have heard it. Do not believe in anything simply because it is spoken and rumored by many. Do not believe in anything merely on the authority of people who are above you. Do not believe in anything simply because it is found written in books. But after observation & analysis, when you find that anything agrees with reason and is conducive to the good and benefit of one and all, then accept it."
LEAVE A COMMENT
LEAVE A COMMENT

Your email address will not be published.

*

Your Email Address will not be published
*

Read More Articles
More from thefinance