Analyst Notes

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.

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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:

  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 Auditors 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.
  3. Annual Data Only: International Financial Reporting Standards (IFRS) do not require the disclosure of interim financial statements. Therefore, some foreign companies in our coverage universe do not report complete income statement and/or balance sheet data on a quarterly basis. We offer only annual data and an annual model for these firms.
  4. Bankrupt: A company that has filed for Chapter 11 or Chapter 7 bankruptcy.
  5. Bankruptcy Threat: Either the company itself or a reputable source has stated that the company is considering a bankruptcy filing.
  6. 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.
  7. 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.
  8. Foreign Filing Delay: Foreign companies have additional time to file with the SEC compared to domestic US companies. During the time between the 3rd quarter filing and the annual filing when the most recently available data for foreign companies is  much older than it is for domestic US companies, we suspend the rating.
  9. 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.
  10. 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.
  11. 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.
  12. 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.
  13. 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.
  14. 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.
  15. 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.
  16. 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.
  17. 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.
  18. 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.
  19. 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.
  20. Not enough filings for a TTM Model: A company with quarterly filings, but not enough to build a trailing-twelve-month (TTM) model. These companies are either recent initial public offerings (IPOs) or spinoffs that have disclosed fewer than 4 quarters worth of data or companies that have started to provide quarterly data when historically they only provided annual data. Our ratings rely on annual or TTM data, so we suspend the ratings for companies where we cannot build a TTM model and have to rely on the last annual filing until we have enough filings to build a TTM model.
  21. 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.
  22. Obsolete Data: A company that has not filed an annual report in over two years.
  23. 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
  24. 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.
  25. 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.
  26. Patent Assertion Entity: Patent Assertion Entities are publicly held companies that generate revenue through purchasing third party patents and enforcing the rights against infringers. Since their valuations often depend on legal decisions and legislative developments rather than underlying business activity, we cannot provide a reliable rating for these companies.
  27. Pending Filing: Shows when we have received a new filing from the SEC but have not yet processed the filing and updated our model.
  28. Press Release: Press releases often provide an incomplete picture of the financials of the company because they are not required to disclose information with the same rigor as quarterly and annual filings. Since we cannot be sure we have a complete and accurate model, we suspend the rating for companies when the most recent data is from a press release. We update our models with data from press releases to provide an earlier look at the updated financials of the company.
  29. 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.
  30. Required Cash Assumption Updated, Model Materially Impacted: We update the assumptions we use to determine the amount of required cash the company needs for its operations. This update also affects excess cash. Both required and excess cash are important inputs into our Invested Capital calculation. Many other calculations rely on Invested Capital. Excess cash is important in our reverse DCF models. The update to our assumption of required cash exceeded our threshold which suspends the company rating. Users should review the impact of this change on our ratings and other calculations in our company models
  31. 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.
  32. Transition: A company whose period end date for its financial reports has recently changed.
  33. 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.

Inactive Stocks - An inactive stock is no longer traded. Our analyst note for inactive stocks includes the last price and trading date. Our rating, report, and model are provided as of the last trading date for reference purposes.

When a stock goes inactive, we append a colon and a unique number to the end of the ticker. For example, if ticker XYZ goes inactive, we'll use XYZ:1 as the ticker to distinguish it from other companies that might use the ticker XYZ in the future. A full list of inactive stocks we cover can be found on our Coverage page.

Other Analyst Notes (that do not result in a Suspended Rating):

  1. Dividend Growth Stocks: Added to the Dividend Growth Stocks Model Portfolio for the current month.
  2. Exec Comp Linked to ROIC: Added to the Exec Comp Aligned with ROIC Model Portfolio for the current month.
  3. Focus List (Long): Added to the Focus List - Long Model Portfolio.
  4. Focus List (Short): Added to the Focus List - Short Model Portfolio.
  5. Forecast Update: Our analysts have updated the company's Default forecast in our discounted cash flow model.
  6. Most Attractive: Added to the Most Attractive Stocks Model Portfolio for the current month.
  7. Most Dangerous: Added to the Most Dangerous Stocks Model Portfolio for the current month.
  8. New Filing: Shows when we have added a new filing to a company's model within the last two weeks.
  9. Poor Disclosure: A company that does not provide adequate information to build our best 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.
  10. Primary Coverage: These companies’ models do not include the proprietary data from the Management Discussion & Analysis (MD&A) and the footnotes that is included in the models for the stocks in our Premium Coverage universe. Note that the proprietary data from the MD&A and footnotes has been proven to create significant idiosyncratic alpha when applied to how we measure Core Earnings, return on invested capital, (ROIC), Economic Earnings and to our Stock Ratings. Primary Coverage models, at a minimum, include financial statement data from the income statement, balance sheet and cash flow statement. In this paper, Harvard Business School and MIT Sloan professors prove that our financial statement data is superior because legacy data firms do not identify about 30% of unusual items on the income statement that are captured in our models.”
  11. 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."
  12. Required Cash Assumption Updated: We updated the assumptions we use to determine the amount of required cash the company needs for its operations. This update also affects excess cash. Both required and excess cash are important inputs into our Invested Capital calculation. Many other calculations rely on Invested Capital as an input. Excess cash is an important adjustment in our reverse DCF models. Users should review the impact of this change on our ratings and other calculations in our company models.
  13. Safest Dividend Yields: Added to the Safest Dividend Yields Model Portfolio for the current month.
  14. Updated Based on Model Enhancements: We’re always working to give clients the best fundamental data and models in the world. There are times when we need to make broad-based updates to certain data collection practices or modeling formulas. Should these changes cause the Overall Rating to change, you will see this note. For example, here are details on our Spring 2019 model update.

This paper compares our analysis on a mega cap company to other major providers.

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