We published an update on DFS on April 26, 2023. A copy of the associated update report is here.
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6 replies to "Superior Service and Exclusive Network Set This Company Apart"
And as of 10/29, you rate DFS as “neutral”?
Roger,
Our Stock Ratings are based on five criteria that measure the strength of a business and the valuation of its stock to assess the risk/reward of owning the stock. However, our Long Ideas and Danger Zone picks offer a more in-depth analysis of a stock’s risk/reward based on an examination of a company’s earnings quality, competitive position, growth opportunities, secular trends, and more. Thanks for reading!
Matt
Thanks for responding. Please help me out here, because I’m afraid I don’t quite fully grasp your response. I understand that “Stock Ratings” are applied to hundreds or thousands of companies using five criteria. I understand that Long Ideas involve more in depth analysis. What I don’t understand about this specific situation is that as of 10/29, the Stock Rating criteria classified DFS as “Neutral”. Yet two days earlier, it was rated as a top pick. Your comment of 11/8 suggests you stand behind that rating. While I understand that not every stock in the top 20% would be a top pick, I read your response to state that even a stock rated “neutral”, that is in the 40-60% quintile, might be one of the very best stocks to buy based upon in depth analysis. If that is correct, why should I have any faith in the “Stock Ratings”? If a “neutral” stock is better than those rated Attractive, and even better than those rated Most Attractive, then it sounds to me like you readers should take the Stock Ratings with a grain of salt. I’m not trying to be critical. I just want to understand. If a “neutral” stock is one of the 10 best choices in the market, it seems to me I should consider the stock ratings as next to worthless. Do you agree?
Roger,
Thanks for the reply. My apologies for not being more clear. While our Stock Ratings have been proven superior to human analysts and are generally in line with our Long Ideas and Danger Zone picks, they cannot incorporate all the factors that might impact the stock’s future performance.
Specifically in this case, Discover’s Neutral rating is driven by the rise in GAAP earnings despite its falling economic earnings over the trailing twelve months. However, as we detailed in this report, we believe its extensive network and customer service (which our Stock Rating does not evaluate) will enable the firm to grow economic earnings from current levels. If the company’s economic earnings improve as we expect, then its rating will also improve.
Our Stock Ratings diligently evaluate five of the most important criteria for assessing the risk/reward of stocks. However, we do not suggest investors exclusively rely on Stock Ratings for making investment decisions. Rather, we encourage investors to incorporate our Stock Ratings as part of their investment process.
Like Roger, I find the inconsistency between the Neutral Stock Rating for DFS and its continued inclusion in the Long Ideas difficult to reconcile. To justify continued economic earnings growth based on highly subjective parameters like extensive network and superior customer service would, in my opinion, appear to fly in the face of a true data-driven assessment.
Also the massive gap between GAAP earnings and Economic Earnings over TTM for DFS should be a huge red flag. When I search for DFS in the Reasearch section I find that in 2011 there were also misleading earnings that resulted in the stock moving from the Most Dangerous list to the Most Atttractive List and then back again within a four month period.
Patrick, Thanks for your message. As we noted to Roger, our Stock Ratings provide an accurate measure of the fundamentals of a business, but they still act as a starting point. Subjective parameters can help build or break down an investment thesis. For instance, fundamentals cannot take into account a large competitor entering an industry (at least until the impact has been realized), but such information would be important in developing an investment thesis.
As laid out in our report, we believe Discover is positioned well to grow economic earnings from current levels, and should it do so, its rating will also improve.