Good Stocks Cheap: Value Investing with Confidence for a Lifetime of Stock Market Outperformance


Case Studies


Good Stocks Cheap: Value Investing with Confidence for a Lifetime of Stock Market Outperformance


Chapter 4: Calculating the Compound Annual Growth Rate Using the Geometric Mean Function in Spreadsheets

Chapter 4 states that the geometric mean function can be used to approximate a compound annual growth rate. And often it can. But sometimes a data set is sufficiently spread out that the geometric mean function gives a materially different answer than would a longhand calculation of of CAGR. One such data set is given in the fourth paragraph of page 23.

The example states that the geometric mean of 2.1%, 16.0% and 32.4% is 10.3%. And it is. But the CAGR is 16.2%. The following spreadsheet shows the difference, as well as the longhand CAGR formula:

Chapter 9: Calculating Unlevered Free Cash Flow from Levered Free Cash Flow

Chapter 9 mistakenly mixes together two different ways to calculate the increase in tax payments when converting levered free cash flow into unlevered free cash flow. Both work, but not when blended.

The first way is the long way. Add back interest payments, and then subtract the foregone tax deduction. The foregone tax deduction is calculated by multiplying added-back interest payments by the tax rate.

The second way is the shortcut. Subtract the tax rate from 100 percent, multiply the result by interest payments, and add that back.

The problem was that the long way was showcased, but the shortcut's percentage was used. This error pops up in two places.

The first is on page 74. To correct it, change paragraph 5 to read:

It's simple to calculate how much tax payments should go up. Start by finding the company's income tax rate. Search the 10-K for the term effective tax rate or, failing that, just tax rate. Then, multiply that percentage by the interest payments that were added back. That's how much tax payments should increase.

The second place the error pops up is on page 77. It's in the Gap case study. Fix it by replacing the last two paragraphs with:

Next, increase tax payments to capture the loss of the tax deduction from interest. A search for the term effective tax rate leads to page 23, which shows it was 37.5 percent in 2015. Total interest added back of $286,729,781 times 37.5 percent equals $107,523,668. That's the tax to subtract.

Therefore, Gap's 2015 unlevered free cash flow equals $2,132,476,332. That's levered free cash flow of $1,953,270,219, plus total interest payments of $286,729,781, minus additional tax payments of $107,523,668.

The related online spreadsheet has been corrected.

Chapter 12: Summary List Out of Order

The summary list of the six potential sources of moat on page 107 is inconsistent with the order in which those sources are presented in the chapter. The correctly ordered list is:

1. Government
2. Network
3. Cost
4. Brand
5. Switching costs
6. Ingrainedness

Chapter 15: Wrong Word

At the top of page 150, the word "prominence" should be "provenance" .