This presentation is about using well-known valuation principles in order to discover the stock market's expectation for a given company's stock. I begin by presenting a different take on the market and the best ways gain a competitive advantage for stock selection. Next, I present the PVGO Thought Process and the key factors that affect the formula. Finally, I walk through examples of using the PVGO Thought Process by analyzing the S&P 500, as well as in analyzing a stock that I would by today, McDonald's (NYSE:MCD).

1. The PVGO Thought Process For EquityValuation
By Michael O. Ijeh
July 16, 2016

2. Keynes’s Famous Beauty Contest Quote For The Stock Market
"It is not a case of choosing those [faces] that, to the best of one's judgment, are really the
prettiest, nor even those that average opinion genuinely thinks the prettiest.We have reached
the third degree where we devote our intelligences to anticipating what average opinion
expects the average opinion to be.And there are some, I believe, who practice the fourth, fifth
and higher degrees.“
Keynes, GeneralTheory of Employment, Interest and Money, 1936

3. Keynes’s Belief – Is It True?
 Keynes believed that behavior of a beauty pageant judge was happening in the stock market
 This would have people pricing shares not based on what they think their fundamental value is, but rather on
what they think everyone else thinks their value is, or what everybody else would predict the average assessment
of value to be.
 It could be true, but one can still gain a competitive advantage in the stock market by viewing the
market in a different manner
Based on “Keynesian Beauty Contest”Wikipedia webpage

4. How To Gain A Competitive Advantage In Stock Selection
 Superior Forecast*
 DifferentView of Valuation*
 Understanding Investor Sentiment*
 Having Insider Information
So is there a way to combine all of these methods for gaining a competitive
advantage in stock selection? (Well, maybe not the insider information)
*Based on FaVeS framework from AnalystSolutions

5. Challenges With TraditionalValuation Techniques
Market Approach (Multiples)
 Can be tough finding a good peer group of
comparable companies since no two companies are
the same
 Market valuations can fluctuate dramatically
 Market prices aren’t always based on fundamentals
or expectations, but even on irrational behavior and
events uncorrelated to a company’s business
 Implicit expectations are baked into a multiple
Income Approach (DCF)
 Can be tough determine the forecast horizon and
the many assumptions that go along with the model
 Shorter horizon – TerminalValue contributes too much
to theValue of the company
 Longer horizon – Greater chance for forecasting error
and will probably be outside of investment horizon
 Could possibly be “garbage in, garbage out”
And is there a way to combine both of these methods for stock selection?

6. So How Can an Investor Gain A Competitive Advantage Without Falling
Into The Common Pitfalls For EquityValuation?
 By trying to understand potential returns the market expects from a stock for a
given investment horizon, and deciding if the market’s expectations are:
 Too High,
 Too Low, or
 Just Right
 From there, an investor can make a recommendation as to if a stock is truly under-,
over-, or fairly valued

7. So How Can We Understand The Market’s Expectations?
Can potentially be done by using the PresentValue of Growth Opportunities
(PVGO)Thought Process:
𝑽𝒂𝒍𝒖𝒆 𝑭𝒊𝒓𝒎 = 𝑽𝒂𝒍𝒖𝒆 𝒐𝒇 𝑭𝒊𝒓𝒎 𝒘𝒊𝒕𝒉 𝑵𝒐 𝑮𝒓𝒐𝒘𝒕𝒉 + 𝑮𝒓𝒐𝒘𝒕𝒉 𝑬𝒙𝒑𝒆𝒄𝒕𝒂𝒕𝒊𝒐𝒏𝒔

8. PVGO Thought Process
 Based off of the Gordon Growth Model, using this train of thought can help an investor understand
the market’s expected returns for a given stock and weigh it against the risk
 Goal of this process is to find stocks of companies that have low growth expectations relative to an
investor’s assessment of a company’s risk and potential returns
𝑽𝒂𝒍𝒖𝒆 𝑭𝒊𝒓𝒎 𝒕 =
𝑬𝒄𝒐𝒏𝒐𝒎𝒊𝒄 𝑩𝒆𝒏𝒆𝒇𝒊𝒕 𝒕+𝟏
𝑫𝒊𝒔𝒄. 𝑹𝒂𝒕𝒆−𝑮𝒓𝒐𝒘𝒕𝒉 𝑹𝒂𝒕𝒆
𝑽𝒂𝒍𝒖𝒆 𝑭𝒊𝒓𝒎 𝒕 =
𝑬𝒄𝒐𝒏𝒐𝒎𝒊𝒄 𝑩𝒆𝒏𝒆𝒇𝒊𝒕 𝒕
𝑫𝒊𝒔𝒄. 𝑹𝒂𝒕𝒆
+ 𝑷𝑽𝑮𝑶

9. Three Main Components Of The PVGO Thought Process
1. The Economic Benefit
I. Which “benefit” will be used? EPS, FCF, Dividends, EBITDA, Pretax Profits, etc.
II. Directly finding EquityValue or indirectly by finding the value of the enterprise first?
III. Timeframe of past “benefit”? LTM, 3 or 5 year average, weighted averages, etc.
2. The Discount Rate / Cost of Capital
I. CAPM
II. Build-up Model
III. Cost of Debt plus Risk Premium
3. Growth Expectations (PVGO %)
I. Past trends in growth and margins for the economic benefit used
II. Potential size of a company’s industry
III. Current part of Company/Industry life cycle
IV. Competitive Analysis
V. Other Fundamental Analysis

10. How PVGO Relates To A Company’s RiskWithin Their Life Cycle
PVGO, Discount Rates, and the Corporate Life Cycle
Growth Stage Start-up Young Growth High Growth Mature Growth Mature Stable Decline
Description Business idea
Create business
model
Build the business, creating revenues
Grow business via operating leverage,
create profitability
Defend business from new competitors and
markets
Scale down business, consolidate
Investing
Option Investing (go
for upside)
Growth Investing
(maximize value from
growth)
Scaling Investing (scale up growth)
Defensive Investing (protect the
competitive advantage)
Maintenance Investing (preserve value) Divesting (shed past investments)
Financing All Equity All Equity
First signs of debt capacity, but little
to no benefits
Debt capacity expands, and the benefits
of borrowing will start to exceed the
costs
Benefits of borrowing significantly exceed
costs
Pay down debt as assets are sold
Revenues None
Finding first
customers, may need
to "grow at all costs"
to gain traction
Revenue growth increases rapidly,
possibly even doubling every year
Revenue growth starts to slow down, but
still growing faster than the broad market
Revenues are more in line with the rest of
the broad market, as competitors start to
saturate the market
Revenues start to decline; only way to grow
significantly is via M&A
Profits / CF None
Cash burn is
extremely high
Signs of profitability start to appear
as losses decrease; business is close
to being CF positive
Profitability starts to grow significantly via
operating leverage
Profitability growth starts to slow down;
business may start to accumulate cash on
hand
Profitability drops off dramatically, as assets are
sold, decreasing the business's earnings power
Value Driver
(Economic
Benefit)
Market Potential
Key Performing
Indicators / Operating
Data
Revenue / Gross Cash Flow Adj. Cash Flow / EBIT / EBITDA Free Cash Flow / Net Earnings Book Value / invested Capital / Dividends
Discount Rate
(Cost of
Equity)
Extremely high, as the
chance of failure is
very high (>40%)
Still very high, as the
business model is still
uproven (30-40%)
Not as high as before since the
business model has gained traction,
but still high due to little to no
profitability (25-30%)
As the business begins to grow profits
and cash flows, the question now is if the
business can be scaled up; returns are still
expected to be higher than the broad
market (15-25%)
As revenues become more in line with the
rest of the broad market, so too should
investor's expectations for returns, as the
business's operational results start to
become more predictable (7-15%)
Investor expectations aligns with what growth
within the entire sector and the overall economy
(4-7%)
PVGO %
Well above 100%, if
not closer to 1000%
due to the market
potential
Still well above 100%;
must start paying
attention to
investments and
understand how
they'll enhance value
Still at or around 100%, especially if
the business is close to or just
becoming profitable
PVGO finally starts to decline, as the
business starts to reach it's potential
from a profitability standpoint; dividends
may start to come into play (50-90%)
Similar to Revenues and the discount rate,
PVGO starts to align with the broad market
as well (25-50%)
PVGO is below the market, as profits are
expected to continue to decrease; may start to
expect dividends to drive PVGO more than
growth in profits (0-25%)

11. How PVGO Relates To A Company’s RiskWithin Their Life Cycle (Cont.)
Time
Growth in Revenues and ProfitsThroughout the
CLC
Revenues Profits
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
0%
50%
100%
150%
200%
250%
Time
Discount Rate and PVGO %Throughout CLC
PVGO (LHS) Discount Rate (RHS)
Young Growth
Young
Growth
Start-up
Start-up
High
Growth
High
Growth
Mature
Growth
Mature
Growth
Mature
Stable
Mature
Stable
Decline
Decline

12. PVGO THOUGHT PROCESS IMPLEMENTATION

13. Understanding The PVGOThought Process – The S&P 500 Since 1990
Data is sourced from Aswath Damodaran’s Implied Equity Risk Premiums (by year) from his website
Year
Dividend
Yield
S&P 500 Earnings* Dividends*
Change in
Earnings
T.Bond Rate
Implied Premium
(FCFE)
Disc.
Rate
EPS/Disc.
Rate
% No
Growth
% PVGO
1990 3.74% 330.22 22.65 12.35 -6.87% 8.07% 3.89% 11.96% 189.38 57.35% 42.65%
1991 3.11% 417.09 19.30 12.97 -14.79% 6.70% 3.48% 10.18% 189.59 45.45% 54.55%
1992 2.90% 435.71 20.87 12.64 8.13% 6.68% 3.55% 10.23% 204.01 46.82% 53.18%
1993 2.72% 466.45 26.90 12.69 28.89% 5.79% 3.17% 8.96% 300.22 64.36% 35.64%
1994 2.91% 459.27 31.75 13.36 18.03% 7.82% 3.55% 11.37% 279.24 60.80% 39.20%
1995 2.30% 615.93 37.70 14.17 18.74% 5.57% 3.29% 8.86% 425.51 69.08% 30.92%
1996 2.01% 740.74 40.63 14.89 7.77% 6.41% 3.20% 9.61% 422.79 57.08% 42.92%
1997 1.60% 970.43 44.09 15.52 8.52% 5.74% 2.73% 8.47% 520.54 53.64% 46.36%
1998 1.32% 1,229.23 44.27 16.20 0.41% 4.65% 2.26% 6.91% 640.67 52.12% 47.88%
1999 1.14% 1,469.25 51.68 16.71 16.74% 6.44% 2.05% 8.49% 608.72 41.43% 58.57%
2000 1.23% 1,320.28 56.13 16.27 8.61% 5.11% 2.87% 7.98% 703.38 53.28% 46.72%
2001 1.37% 1,148.09 38.85 15.74 -30.79% 5.05% 3.62% 8.67% 448.10 39.03% 60.97%
2002 1.83% 879.82 46.04 16.08 18.51% 3.81% 4.10% 7.91% 582.05 66.16% 33.84%
2003 1.61% 1,111.91 54.69 17.88 18.79% 4.25% 3.69% 7.94% 688.79 61.95% 38.05%
2004 1.60% 1,211.92 67.68 19.407 23.75% 4.22% 3.65% 7.87% 859.97 70.96% 29.04%
2005 1.79% 1,248.29 76.45 22.38 12.96% 4.39% 4.08% 8.47% 902.60 72.31% 27.69%
2006 1.77% 1,418.30 87.72 25.05 14.74% 4.70% 4.16% 8.86% 990.07 69.81% 30.19%
2007 1.89% 1,468.36 82.54 27.73 -5.91% 4.02% 4.37% 8.39% 983.79 67.00% 33.00%
2008 3.11% 903.25 65.39 28.05 -20.78% 2.21% 6.43% 8.64% 756.83 83.79% 16.21%
2009 2.00% 1,115.10 59.65 22.31 -8.78% 3.84% 4.36% 8.20% 727.44 65.24% 34.76%
2010 1.84% 1,257.64 83.66 23.12 40.25% 3.29% 5.20% 8.49% 985.39 78.35% 21.65%
2011 2.07% 1,257.60 97.05 26.02 16.01% 1.88% 6.01% 7.89% 1,230.04 97.81% 2.19%
2012 2.13% 1,426.19 102.47 30.44 5.58% 1.76% 5.78% 7.54% 1,359.02 95.29% 4.71%
2013 1.96% 1,848.36 107.45 36.28 4.86% 3.04% 4.96% 8.00% 1,343.13 72.67% 27.33%
2014 1.92% 2,058.90 113.01 39.44 5.17% 2.17% 5.78% 7.95% 1,421.51 69.04% 30.96%
2015 2.11% 2,043.94 106.32 43.16 -5.92% 2.27% 6.12% 8.39% 1,267.22 62.00% 38.00%
Avg. 2.08% 7.02% 4.61% 4.09% 8.70% 731.92 64.34% 35.66%
Median 1.94% 8.33% 4.52% 3.79% 8.47% 696.09 64.80% 35.20%

14. What The PVGOThought Process Can Tell Us About The Market Over
The Past 25Years…
 Since 1990, the average market participant could expect:
 2% DividendYield,
 7-8% EPS Growth,
 8-9% Discount Rate based off of CAPM for Cost of Equity,
 9-10% Discount Rate based off of GGM for Cost of Equity,
 And 35% of the price based on future growth expectations

15. And What About TheTypical Investor’s Time Horizon?
 Based on the range of Discount Rates (7-10%), the PVGO Though Process shows that the typical investor’s time
horizon within the market is anywhere from 4-7 years
At a 7% Discount Rate
No-Growth %
64%
PVGO %
36%
$100 $55
Years 0 1 2 3 4 5 6 6.5
$100 $107 $114 $123 $131 $140 $150 $155
At a 10% Discount Rate
No-Growth %
65%
PVGO %
35%
$100 $54
Years 0 1 2 3 4 4.5
$100 $110 $121 $133 $146 $154

16. So What About The S&P 500 Index Now?
1. Economic Benefit Used
1. TTM EPS (1Q15-1Q16)
1. $98.61 – from S&P Dow Jones Indices - S&P 500 Earnings And Estimate Report, 7/7/16
2. Discount Rate Used
1. 1.53% - 10Year U.S.Treasury Note for 7/14/16
2. 6.27% - (+) Implied ERP - TTM CashYield from Aswath Damodaran’s website
3. 7.80% - Discount Rate
3. PVGO %
1. $98.61 – TTM EPS
2. 7.80% - (/) Discount Rate
3. $1,264.23 – MarketValue of S&P 500 with No-Growth Expectations

17. Implications of S&P 500’s PVGO Status
 With the S&P 500 at $2,161.74 (7/15/16), the No-Growth value of the S&P 500 represents 58% of the market price, meaning 42% of the market
price represents expected growth in value in the future
 The PVGO % represents 20% CAGR over a 3 year investment horizon, or a 9% CAGR over a 5 year investment horizon
 The key question to ask is are the implied growth rates of the market reasonable, too optimistic, or too pessimistic?
 For comparison, the S&P 500 Earnings And Estimate Report from S&P Dow Jones Indices projects 23% EPS growth for the next twelve months, and
17% CAGR through the end of 2017
 Don’t forget that the LT average for PVGO % is around 35%, for 8-10% annual rate of return when taking dividends into consideration, which is still
yields around 2%, which accounts for 6% of the PVGO % for a 3 year horizon and 9% PVGO % for a 5 year horizon, and if share repurchases
continue to happen, then EPS growth might not need to be as high to reach current market expectations
At a 20% Discount Rate
No-Growth %
58%
PVGO %
42%
$100 $73
Years 0 1 2 3
$100 $120 $144 $173
At a 11% Discount Rate
No-Growth %
59%
PVGO %
41%
$100 $69
Years 0 1 2 3 4 5
$100 $111 $123 $137 $152 $169

18. So What AboutValuing a Company? McDonald’s (NYSE: MCD) Maybe…
1. Economic Benefit Used
1. TTM FCF in $MM (CFO – CAPX) (1Q15-1Q16)
1. $4,476 – from Morningstar’s Financial Calculations, 7/15/16
2. Discount Rate Used
1. 6.27% - (+) Implied ERP - TTM CashYield from Aswath Damodaran’s website
2. 0.52 - (x) MCD’s Beta from Google Finance and Zacks, 7/15/16
3. 3.26% - ERP for MCD
4. 1.53% - (+) 10Year U.S.Treasury Note for 7/14/16
5. 4.79% - MCD’s Discount Rate
3. PVGO %
1. $4,476 – TTM FCF in $MM
2. 4.79% - (/) Discount Rate
3. $99,073.15 – MarketValue of MCD with No-Growth Expectations ($MM), or ~$112/Share

19. Implications of MCD’s PVGO Status
 With MCD having a market cap of at $109,409 MM, or ~$124/share (7/15/16), the No-Growth value of MCD represents 91% of the market price, meaning only
9% of the market price represents expected growth in value in the future
 The PVGO % represents about 3.5% CAGR over a 3 year investment horizon, or a 2% CAGR over a 5 year investment horizon
 The key question to ask again is are the implied growth rates of the market reasonable, too optimistic, or too pessimistic?
 Remember, MCD is currently paying a near 3% dividend yield, which means that there has to be plenty of FCF to distribute, in which there is based on MCD’s
overall franchising strategy and 15-19% FCF margin, essentially being a Cash Cow
 If any growth in FCF or FCF margin happens in the near future, MCD will be well worth the investment, especially if a potential investor believes that MCD
expanding their all-day breakfast menu will lead to more cash flow for dividend growth, or higher growth expectations, which will lead to multiple expansion and
appreciation in MCD’s stock price
 This may lead an investor to think that the market expectations are too pessimistic, unless fears from slower international sales from Brexit, or if U.S. same-store
sales growth becomes stagnant because customers might not react well to MCD increase prices and having higher-quality food will slowdown FCF generation
At a 3.5% Discount Rate
No-Growth %
90%
PVGO %
10%
$100 $11
Years 0 1 2 3
$100 $104 $107 $111
At a 2% Discount Rate
No-Growth %
91%
PVGO %
9%
$100 $10
Years 0 1 2 3 4 5
$100 $102 $104 $106 $108 $110

20. Conclusion
 The PVGO Thought Process can be used as an attempt to quantify the market’s growth expectations for a stock
 Can lead to higher accuracy in forecasting economic benefits and understanding investor sentiment for a
company’s stock
 Can also be used to understand what stage the market may think a company is at in their Corporate Life Cycle
 This process is best used for investors that fully understand the major inputs:
1. Economic Benefit
2. Discount Rate
3. PVGO % of the company relative to it’s own history and peers
4. An investor’s time horizon

21. Key Resources
 Expectations Investing: Reading Stock Prices for Better
Returns by Michael J. Mauboussin – CFA Publications
(September 2006)
 Fundamental Analysis and Market Prices Presentation for
the OIV Conference by Stephen Penman
 Aswath Damodaran’s website and publications
 New Construct’s website
 Valuation: Measuring and Managing theValue of
Companies: Fourth Edition – byTim Koller, Marc
Goedhart, and DavidWessels
 Understanding BusinessValuation – by Gary R.Trugman
 Best Practices for Equity Research Analyst and
AnalystSolutions website by JamesValentine
 Morningstar’s website
 Zacks’ website
 Marketwatch’s website
 Barron’s website
 Federal Reserve Economic Data
 S&P Dow Jones Indices