Analyst Notes: Definitions

Every day our analyst team reviews thousands of filings and headlines to ensure our ratings are as accurate and useful as possible. The “Analyst Notes” column on the stock screener and on all Portfolios at newconstructs.com features insights into corporate events or disclosures that cause us to question the validity of a company’s financial reporting or the efficiency of the market for its stock.

We also highlight stocks that are on the Most Attractive or Most Dangerous lists. These stocks — which our analysts have flagged as the best and worst investments for the month— are available only to our subscribers.

We exclude all companies in categories 1-16 from consideration for our Most Attractive and Most Dangerous stocks. We do not remove these stocks from coverage or change our ratings on them because many clients may not agree with our assessment and may still want to know our rating on earnings quality and valuation.

1. Acquisition Target: A company labeled “Acquisition Target” has received a friendly or hostile takeover bid from another company. The share price going forward will likely depend on the progress of the acquisition rather than the underlying fundamentals of the stock.
2. Adverse Auditor’s Opinion: The auditor of the financial statements has indicated that the statements may have material misstatements or may not be represented fairly in accordance with U.S. Generally Accepted Accounting Practices (GAAP). In such cases we cannot trust the financial statements and therefore our model is unreliable.
3. Bankrupt: A company that has filed for Chapter 11 or Chapter 7 bankruptcy.
4. Bankruptcy Threat: Either the company itself or a reputable source has stated that the company is considering a bankruptcy filing.
5. For Sale: A company that has put itself up for sale. A “For Sale” company will not have received a formal takeover bid, but it will have announced its intention to sell itself. The stock price of the company will be primarily driven by non-economic news going forward.
6. Going Concern: The Independent Auditor’s Report states that the company may no longer continue to operate in the foreseeable future. Our ratings are based on the operating profit (NOPAT) of a company continuing into the foreseeable future, so if the company ceases to operate our ratings are not useful.
7. Hybrid REIT: Hybrid REITs combine the strategies of Equity REITS and Mortgage REITS, so their operating revenue has both rental and interest components. Similar to the “Poor Disclosure” note, these Hybrid REITs don’t adequately distinguish between their different businesses, so our models cannot accurately reflect the underlying economics of the business.
8. Large Acquisition: A company that has announced it will acquire another company or part of a company that is worth at least 35% of its current assets. Such a large acquisition significantly alters the economics of the business and makes it incomparable to previous years.
9. Large Divestiture: A company that has announced it will dispose of a portion of its assets that is worth at least 35% of its current assets. Such a large divestiture significantly alters the economics of the business and makes it incomparable to previous years.
10. Late Filing: A company that has not filed its 10-K within 90 days of its fiscal year end. For these companies the data we have is not current enough to make a reliable investment decision.
11. Liquidation: A company that has announced its intention to liquidate its assets. Our model is no longer useful for such a company.
12. OTC: A company that trades outside of a formal exchange such as the NYSE, NASDAQ, AMEX, etc. Such companies are usually very small and unable to meet the listing requirements of a major exchange. Shares of these companies are generally thinly traded and more vulnerable to price manipulation.
13. Other: Special circumstances that make our existing model either unreliable or outdated. For instance, Global Ship Lease (GSL) has Class B shares that are option-like in that their claim to future cash flows is dependent on performance. This introduces a level of uncertainty into our count for shares outstanding.
14. Poor Disclosure: A company that does not provide enough information to create a fully comparable model. These are companies with both financial and non-financial arms that are not adequately separated in the financial statements. Since we treat interest expense, debt, and cash differently for financial and non-financial companies, we cannot ensure the comparability of our models if the company does not break out what percentage of interest, debt, and cash is attributable to each segment.
15. Receivership: A “receiver” has been appointed to run the company, usually with the intention of selling off the company’s assets to pay as many of its debts as possible. Similar to ‘”Going Concern” or “Liquidation” in that it makes our operating profit based model no longer useful.
16. Risk of Fraud: Companies whose financial statements have a high risk of being misrepresented due to fraud. Chinese reverse takeovers (RTOs), Chinese companies with small or unknown auditors, Chinese companies with auditors that are currently being investigated by a regulatory agency, or Chinese companies currently under investigation for fraud, poor disclosure, or dubious business practices. Chinese companies such as Baidu (BIDU) and Sina (SINA) do not fall under this category.
17. Rating Change: We have changed this company’s risk/reward rating within the last two weeks. The note will include the date of the rating change and if the company has been “Upgraded,” “Downgraded,” or if coverage has been “Initiated.”
18. New Filing: Shows when we have added a new filing to a company’s model within the last two weeks.
19. Forecast Update: Our analysts have updated the company’s profitability forecast. This update will alter our projection on the company’s ability to grow into its valuation.

For access to our stock screener and Most Attractive/Most Dangerous reports, as well as access to our ETF/Mutual Fund screeners and free reports, click here to subscribe.