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New Stocks For Most Attractive/Dangerous Lists

September sees 16 new stocks make our Most Attractive list and 14 new stocks fall into the Most Dangerous category. Our Most Attractive stocks have high and rising return on invested capital (ROIC) and low price to economic book value ratios. Most Dangerous stocks have misleading earnings and long growth appreciation periods implied in their market valuations.
by David Trainer, Founder & CEO
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Midyear Acquisitions – Invested Capital Adjustment

When a company makes an acquisition, the entire purchase price is added to the company’s balance sheet in the year of the acquisition along with any assumed debts or other long-term liabilities. However, the only income added to the income statement is that which occurs after the acquisition closes. In other words, the balance sheet is charged with the full price of the acquisition while the income statement only gets partially impacted.
by David Trainer, Founder & CEO
New Constructs
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Danger Zone 8/30/13: LinkedIn (LNKD)

LNKD continues our theme of hot stocks that have overshot their fair valuations. So far this year, LNKD is up 110% while the S&P 500 (SPY) is only up 15%. LNKD is a high-momentum stock in a popular sector, so investors are turning a blind eye to its competitive weaknesses and high valuation. Most people are aware that LNKD is expensive compared to its current earnings, but few people seem to aware of its off-balance sheet liabilities and the alarming level of profit growth implied by its stock price.
by David Trainer, Founder & CEO
excess cash
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Excess Cash – Valuation Adjustment

For most companies, we estimate the required amount of cash for normal business operations to be around 5% of sales. However, many companies hold cash or other liquid investments above and beyond this amount. We refer to this extra amount as excess cash. This surplus cash can be used for any number of purposes, including acquisitions, research and development, and cushioning the company against economic downturns. Excess cash is immediately available for distribution to shareholders, so we add a company’s excess cash to our calculation of shareholder value.
by David Trainer, Founder & CEO
discontinued operations assets
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Discontinued Operations – Valuation Adjustment

There is one last adjustment we must make involving discontinued operations: adding net assets from discontinued operations to shareholder value. Because discontinued operations are parts of a company being held for sale, the value of the net assets from these discontinued operations approximate the cash the company will receive from the sale. This cash will then be available for distribution to shareholders.
by David Trainer, Founder & CEO
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Preferred Stock – Valuation Adjustment

Preferred stock is a hybrid instrument that carries no voting rights but has a senior claim on assets and cash flows to common stock. Dividends usually must be paid out to preferred stock owners before common stock owners can receive any money. In the event of liquidation, preferred shareholders also have priority.
by David Trainer, Founder & CEO