Analyst Notes provide additional insights into stocks and our ratings on them. We review thousands of filings every day to alert clients to 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.
A Suspended Rating indicates that we feel the company's latest reported financials are no longer reliable or indicative of the risk/reward of the stock. For example, an announcement of an acquisition or spin-off means the current financial statements could change significantly. Until the company gives us updated financials, we have no way of reliably modeling the current business. We also suspend our rating when certain events cause a stock to be driven by news instead of fundamentals.
We exclude stocks with suspended ratings from consideration for our Model Portfolios. We do not remove these stocks from coverage so that clients can still see our assessment of the risk/reward of the stock before the event that caused us to suspend the rating.
Details behind Suspended Ratings:
- 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.
- 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.
- Bankrupt: A company that has filed for Chapter 11 or Chapter 7 bankruptcy.
- Bankruptcy Threat: Either the company itself or a reputable source has stated that the company is considering a bankruptcy filing.
- Business Development Company (BDC): A business development company typically invests in highly volatile debt & equity investments to generate income via capital appreciation, dividends, and interest. In order to qualify, a company must pay out 90% of taxable income to investors annually. Due to the complexity and uncertainty surrounding future cash flows, it is difficult to reliably provide a valuation for these companies.
- FDA Dependent Revenue: A company that is heavily reliant on FDA approval of products for future revenue lacks a foundation upon which we can predictably model the company’s future cash flows. Because the economics of the business are not captured in existing disclosures and the uncertainty surrounding FDA approval, we opt to suspend our ratings on these companies.
- For-Profit College: For-profit colleges are publicly held companies that operate institutes of higher education and often depend on federal student loans for the majority of their revenue. These companies have become politically controversial due to allegations of fraud and misleading advertising. Since their stock prices are largely driven by political and legal developments, we cannot provide a reliable valuation for these companies.
- 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 "for-sale" related news going forward.
- Going Concern: The Independent Auditor’s Report states that the company may no longer continue to operate in the foreseeable future. Such an Opinion means that the latest financial statements may not be indicative of the future.
- 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. Consequently, the financial statements are not as reliable.
- Large Acquisition: A company that has announced it will acquire another company or part of a company that is worth at least 10% of its current assets. Such a large acquisition will significantly alter the financials of the business. Therefore, the current financials are not as reliable as we require.
- Large Divestiture: A company that has announced it will dispose of a portion of its assets that is worth at least 10% of its current assets. Such a large divestiture will significantly alter the financials of the business. Therefore, the current financials are not as reliable as we require.
- Late Filing: A company that has not filed its 10-K within 90 days of its fiscal year end. There is no longer current enough data available in the market place to derive a reliable risk/reward rating on a stock.
- Liquidation: A company that has announced its intention to liquidate its assets has decided not to be a going concern. As a result, our forward-looking risk/reward rating is not as useful to assessing the investment quality of this stock.
- Litigation: A company engaged in litigation expected to meaningfully alter the business forces us to suspend our rating. We cannot reliably produce a model that reflects a company’s future profitability due to the absence of valid and up to date disclosures.
- Master Limited Partnership (MLP): An MLP is commonly operated by a general partner and owned by limited partners. The distribution structure favors the general partner - as earnings per unit crosses specific thresholds, the general partner’s claim on cash flows increases while the limited partners’ claim decreases. Since it is impossible to predict when and by how much these thresholds will be crossed, we cannot accurately model the cash flows attributable to limited partners.
- No Revenue: A company that has not received revenue or sales for the last twelve months. These companies are often biotechnology, small pharmaceutical, or growth companies that survive on outside investment funding alone.
- Non-Reliance: A company whose recently released financial reports can no longer be relied upon due to material misstatements or errors. The company is expected to restate the financial reports in a separate amendment or retrospectively in the next financial report.
- Obsolete Data: A company that has not filed an annual report in over two years.
- Old Stock Quote: A company whose most recent stock price quote is more than 1 day old. The company is likely no longer traded and will soon be set to inactive on the New Constructs system
- 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.
- Other: Special circumstances where the reported financials provide inadequate disclosures for assessing the risk/reward of a stock. For example, Global Ship Lease (GSL) has Class B shares that have an option-like claim on future cash flows that is dependent on company performance. As a result, we cannot reliably calculate the shares outstanding.
- Pending Filing: Shows when we have received a new filing from the SEC but have not yet processed the filing and updated our model.
- Poor Disclosure: A company that does not provide enough information to sustain our financial models. For example, companies with both financial and non-financial divisions that so not disclose adequate details on the different divisions get this note. We cannot ensure the integrity and comparability of our models if the company does not break out what percentage of interest, debt, and cash is attributable to each segment.
- 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", our forward-looking risk/reward rating is not as useful to assessing the investment quality of this stock.
- Risk of Fraud: Companies whose financial statements have a high risk of being misrepresented due to fraud. This note can apply in a wide variety of situations such as Chinese reverse takeovers (RTOs), Chinese companies with small or unknown auditors, companies with auditors that are currently being investigated by a regulatory agency, or companies currently under investigation for fraud, poor disclosure, or dubious business practices.
- Transition: A company whose period end date for its financial reports has recently changed.
- Weak Internal Controls: When management or the internal auditor identifies a material weakness in the company’s internal controls, it is possible for misstatement of the financial statements to occur as well as the inability to pinpoint the error in a timely manner. Thus, we suspend our rating when a company has weak internal controls.
Other Analyst Notes (that do not result in a Suspended Rating):
- 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."
- New Filing: Shows when we have added a new filing to a company's model within the last two weeks.
- Forecast Update: Our analysts have updated the company's Default forecast in our discounted cash flow model.
- Most Attractive: Added to the Most Attractive Stocks Model Portfolio for the current month.
- Most Dangerous: Added to the Most Dangerous Stocks Model Portfolio for the current month.
- Exec Comp Linked to ROIC: Added to the Exec Comp Aligned with ROIC Model Portfolio for the current month.
- Safest Dividend Yields: Added to the Safest Dividend Yields Model Portfolio for the current month.
- Dividend Growth Stocks: Added to the Dividend Growth Stocks Model Portfolio for the current month.
- Focus List (Long): Added to the Focus List - Long Model Portfolio.
- Focus List (Short): Added to the Focus List - Short Model Portfolio.