The Good, the Bad and the Ugly In Consumer Staples ETFs

If you want to be in a sector ETF, the Consumer Staples Sector is the only place to shop. However, not all ETFs are made the same. Despite the predominance of Attractive-rated stocks in the Consumer Staples Sector, there are still ETFs that investors should be careful to avoid.

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Stock Pick of the Week: Buy Kirkland’s Inc. (KIRK)- Very Attractive Rating

HIDDEN GEMS:
1. Our discounted cash flow analysis shows that KIRK’s current valuation (stock price of $13.25) implies that the company’s profits will decline by 50% and never grow again.
2. Economic earnings are growing faster that reported accounting earnings.
3. Free cash flow of $32.2mm or 12.4% of its enterprise value during the last fiscal year.

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Proof Is In Performance Thru 4Q10

There are many ways to define the qual­ity and merit of equity research. One mea­sure stands tallest: per­for­mance of stock rec­om­men­da­tions. And by that mea­sure, New Con­structs’ research is of very high qual­ity (espe­cially for the price!!).

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Telecom Sector ETFs Are Best Left Alone

We recommend investors avoid Telecommunication Sector ETF as that sector is one 4 sectors to our “dangerous” rating.

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Stock Pick of the Week: Sell/Short Integrated Device Technology, Inc. (IDTI)- Very Dangerous Rating

Of the 561 technology stocks we cover, IDTI is one of the 77 that get our “very dangerous” rating and one of the few that make our most dan­ger­ous stocks list for January. The tech sector is tricky because there are several large-cap excellent stocks (MSFT, ADI and AAPL) that make the sector look very good and offer good hiding for some “very dangerous” smaller-cap stocks such as IDTI.

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Neutral Rating for Financial Sector Means ETF Investors Should Beware

Investors in Financial Sector ETFs needs to be very careful about which ETF they buy because there are simply not that many good stocks as compared to bad stocks in the sector. The Financial sector is one of 5 that gets our Neutral rating.

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Red Flag Report: Hidden Management Failures: Asset-Write Downs

Most investors are not aware of how many corporate managers destroy shareholder value because accounting rules allow them to erase their mistakes from financial statement. A little-known accounting trick called an “asset-write down” allows managers to simply remove assets and shareholders’ equity from the balance sheet as if they never existed.
Investors must beware companies that report artificially high profits due to asset-write-down loophole.

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Stock Pick of the Week: Buy Apollo Group Inc cl A (APOL)- Very Attractive Rating

HIDDEN GEMS:
1. Our discounted cash flow analysis shows that APOL’s current valuation (stock price of $42.31) implies that the company’s profits will decline by 60% and never grow again.
2. Economic earnings are higher than reported accounting earnings.
3. Excess cash of $1,201mm or about 20% of its market cap

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Stock Pick of the Week: Sell/Short BJ’S Restaurants (BJRI)- Very Dangerous Rating

Red flags:
1. Mis­lead­ing earn­ings: BJRI reported a $3mm increase in GAAP earn­ings while our model shows eco­nomic earn­ings declined by $2mm (a dif­fer­ence of $5mm or nearly 40% of reported net income) during the last fiscal year.
2. Very dan­ger­ous val­u­a­tion: stock price of $34 implies BJRI must grow its NOPAT at over 20% com­pounded annu­ally for 15 years. A 15-year growth appre­ci­a­tion period with a 20%+ com­pound­ing growth rate sets expectations for future cash flow performance quite high. Historical growth rates are much lower.
3. Free cash flow was -$83mm or -11% of the company’s enterprise value last year.
4. Off-balance sheet debt of $265mm: 79% of net assets and 25% of market value.
5. Outstanding stock option liability of $44mm or 5% of current market value.

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Tech and Pharma Stocks are Most Attractive for January

January’s Most Attractive Stocks are now avail­able. Technology and Pharmaceutical stocks predominate compared to other sectors. One newcomer to the list, Seagate Technology (STX), is actually an old friend. STX made our subscribers a lot of money when the stock jumped on acquisition speculation last fall. After that jump, the stock was too expensive to…

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Retail and Financials Are Most Dangerous in January

Retail and Financials are the most common stocks on our Most Dangerous Stocks list for January. Now that the holiday shopping season is behind us, we see little incremental upside in the retail and financial sectors.

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Starbucks -Don’t Be Fooled Again: Stong Brand Does Not Equal Strong Stock

We went on record that investors should short SBUX on 11/6/2006 when the stock was close to $38 per share. Click here to see the Fortune Article. The stock did not look attractive to us until 2 years (11/18 – 11/20/08) later when it was under $8, and that for only about 3 days. And ever since we have had a Neutral or Dangerous Rating on the stock.

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Stock Pick of the Week: Buy Accenture Plc (ACN)- Very Attractive Rating

HIDDEN GEMS:
1. Our dis­counted cash flow analy­sis shows that ACN’s cur­rent val­u­a­tion (stock price of $48.59) implies that the company’s prof­its will decline by 9% and never grow again.
2. Eco­nomic earn­ings are higher than reported accounting earnings.
3. Excess cash of $3,728mm or about 12% of its market cap

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Stock Pick of the Week: Sell/Short Discover Financial Services (DFS) – Very Dangerous Rating

RED FLAGS:
1. Mis­lead­ing earn­ings: DFS reported a $295mm increase in GAAP earn­ings while our model shows eco­nomic earn­ings declined by $998mm (a dif­fer­ence of $1,293mm or over 100% of reported net income). The majority of the overstated reported earnings comes from a one-time gain from an anti-trust settlement of $1,892mm.
2. Very dan­ger­ous val­u­a­tion: stock price of $19 implies DFS must grow its NOPAT at over 10% com­pounded annu­ally for 40 years. A 40-year growth appre­ci­a­tion period with a 10%+ com­pound­ing growth rate sets expectations for future cash flow performance quite high. Historical growth rates have never been much lower.
3. Free Cash Flow was -$2,470mm or -26% of the company’s enterprise value last year.
4. Asset write-offs of $428mm or 5% of net assets – this means that management has written off at least $0.05 of assets for every $1 on the current balance sheet. Writing off assets is the opposite of creating shareholder value as it reflects management’s inability to derive any profits for the investments it makes with shareholder funds.
5. Off-balance sheet debt of $38mm or 0.5% of net assets.
6. Outstanding stock option liability of $8mm or less than 1% of current market value.

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Stock Pick of the Week: Buy Analog Devices Inc (ADI) – Very Attractive Rating

HIDDEN GEMS:
1. About $15 million in non-operating expenses (after-tax) cause reported earnings to be understated.
2. Our dis­counted cash flow analy­sis shows that ADI’s cur­rent val­u­a­tion (stock price of $37.18) implies that the company’s prof­its will decline by 10% and never grow again.
3. The com­pany grew its eco­nomic earn­ings by $283mm dur­ing its last fis­cal year.
4. Excess cash of $2,462.5mm or nearly 25% of its market cap

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Tech and Pharma Stocks Are “Most Attractive” for December

The Decem­ber ver­sion of our Most Attrac­tive Stocks report is now avail­able. Note that Barron’s recently rec­og­nized our Most Attrac­tive Stocks port­fo­lio as #1 over the prior 12 months amongst the best of the Wall Street research firms. Lots of tech and pharma stocks make this month’s list. For example, Microsoft (MSFT) and Analog Devices…

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REITs and Financial Stocks Are “Most Dangerous” for December

The December version of our Most Attractive Stocks and Most Dangerous Stocks reports are now available for purchase. Note that Barron’s recently recognized our Most Attractive Stocks portfolio as #1 over the prior 12 months amongst the best of the Wall Street research firms.

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Fundamental Research for ETFs & Mutual Funds: Look Out Morningstar

Ever wondered what it would be like to evaluate funds and ETFs with the same rigor that you can evaluate individual stocks – that is exactly what we deliver in the our Mutual Fund Rating and ETF Reports. Samples provided

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The Leak on WikiLeaks – Regulators Knew About Risks That Led to Financial Fallout

While I cannot predict what WikiLeaks will leak about some major banks, I have a hunch that one of the revelations might be from a special New Constructs report provided to the Senate Banking Committee’s Subcommittee on Securities, Insurance, and Investment.

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Stock Pick of the Week: JDA Software Group Inc (JDAS) – Very Dangerous Rating

Red Flags:
1. Mis­lead­ing earn­ings: JDAS reported a $14.6mm increase in GAAP earn­ings while our model shows eco­nomic earn­ings declined by $12.9mm (a dif­fer­ence of $27.5mm or 155% of reported net income).
2. Very dan­ger­ous val­u­a­tion: stock price of $27 implies JDAS must grow its NOPAT at over 20% com­pounded annu­ally for 10 years. A 10-year growth appre­ci­a­tion period with a 20%+ com­pound­ing growth rate sets expectations for future cash flow performance quite high.
3. Free Cash Flow was -$203mm or -15% of the company’s enterprise value last year.
4. Asset write-offs of $21mm or 3% of net assets – this means that management has written off at least $0.03 of assets for every $1 on the current balance sheet. Writing off assets is the opposite of creating shareholder value as it reflects management’s inability to derive any profits for the investments it makes with shareholder funds.
5. Off-balance sheet debt of $40mm or 6% of net assets.
6. Outstanding stock option liability of $13mm or 1% of current market value.

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