Buy Eli Lilly & Company (LLY) – Attractive and Safe Enough To Take Home To Mom

The risk/reward of this stock is quite compelling. Downside risk is low as the valuation already implies a permanent 54% decline in profits. How much worse can the valuation get? Upside reward potential is strong as the stock has to go over $77/share to trade at a value that implies the company’s profits will experience a 0% decline, still a no-growth scenario.

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No Security In VirnetX Holding Corp’s (VHC) Stock

Is VHC the next Google? The market’s current valuation seems to suggest it is that and much more.
Very few times in the last 15 years have I found a stock as expensive as VHC. The only comparable situation that comes to mind is Google (GOOG) at its IPO.

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For Ask Matt Readers: Micron Technology, Inc. (MU) – Neutral Rating

Micron Technology, Inc. (MU) gets our Neutral rating. Bottom line: we recommend you invest in SNDK, not MU.

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Not All Chip Stocks Are Made the Same: Buy SanDisk Corporation (SNDK)

SanDisk Corporation (SNDK) is not getting the credit it deserves for the level of profitability it achieved in 2010. And I am not talking about the accounting profits, but the economic profits, which grew 1000% last year while accounting profits grew only 213%. You can ignore the “bear signals” from stock technicians and fears over…

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Take Gains on Discover Financial (DFS) To the Bank

Since we made DFS the Stock Pick of the Week on Feb 15, 2011, the stock is up about 14% while the S&P500 is up about 0.3%. The stock was super-cheap when we made the call, and that is no longer the case. After making the February and March lists, DFS is no longer one of our Most Attractive Stocks in April.

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Accounting Is Fishy at the Zumiez (ZUMZ) Surf Shop

2010 earnings for the retail apparel sector have been quite strong, especially compared to 2009. However, looking behind the window dressing of reported earnings, we find that not all earnings are made the same. Zumiez Inc. (ZUMZ), retailer of cool, new action apparel turned to an old accounting trick to boost its 2010 earnings by 13%

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Dead Company Walking: Sell Eastman Kodak (EK)

What I bet very few people, outside the company itself, know is that EK’s pension liabilities could torpedo the company into bankruptcy and send the stock to significantly lower levels. In the company’s recently published 10K, we found that EK’s pension obligations are underfunded by $2.6 billion, about 3 times the company’s market value.

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Back Up the Truck: Intel Is Too Cheap To Pass Up…Again

Recent weakness in Intel (INTC)’s stock presents an excellent buying opportunity for investors. As one of March’s most attractive, INTC offers the rare combination of strong cash flow growth with a remarkably cheap valuation.

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For Ask Matt readers:Caterpillar Inc. (CAT) — Dangerous Rating

Caterpillar Inc. (CAT) gets our Dan­ger­ous Rat­ing. This means CAT’s quality-of-earnings are not attractive and the stock’s valuation it very expensive.

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Bleeding Reserves To Artificially Boost EPS: Sell Principal Financial Group, Inc. (PFG)

Principal Financial Group, Inc. (PFG) reported accounting earnings in 2010 that are misleading compared to the true economic earnings of the business. PFG’s 2010 reported earnings are artificially boosted by a reduced loan loss expense, which is funded by a draw down of the company’s loss reserves.

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Red Flag Report: Hidden Expenses/Income: What You Don’t Know Can Cost You

Most investors are not aware that companies hide one-time and unusual charges and income inside normal, operating line items (e.g. “Cost of sales”) on their income statement. These hidden items can mislead investors by artificially decreasing/increasing GAAP earnings. We found 13,000+ one-time items buried in normal line items like “Cost of Sales” by studying the Footnotes of 10-K filings from 1998 thru 2/15/2011. This research revealed that companies have concealed over $41 billion in one-time items.

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Score A Takedown and Buy World Wrestling Entertainment, Inc. (WWE) – Very Attractive Rating

Don’t be fooled by the histrionics and high-flying stunts. World Wrestling Entertainment is an excellent business. With a return on invested capital over 22%, it is one of the most profitable companies in the United States. Excess cash is $207mm, more than 20% of the company’s market value.

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For Ask Matt readers: Ford (F) — Dangerous Rating

Ford gets our Dangerous Rating. This means F has poor quality-of-earnings and an expensive valuation. For example, F’s ROIC at 0.6% is in our Bottom Quintile. And the valuation of the current stock price ($15.07) implies the company will grow its profits at 10% compounded annually for over 40 years. The takeaway: avoid this stock.

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The Ride Is Over: Sell Ariba Inc. (ARBA)

Over the past 10 years, ARBA appears as quite a success story and one of the few ‘internet bubble’ companies to survive and reach profitability, on a GAAP accounting basis at least. Looking beyond the reported accounting results, however, reveals that ARBA is not quite as profitable a company as it seems, and its valuation has out-grown its profits by a wide margin – the required combination of factors for making February’s list of most dan­ger­ous stocks.

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Stock Pick of the Week: Buy Discover Financial Services (DFS)- Very Attractive Rating

HIDDEN GEMS:
1. Our dis­counted cash flow analy­sis shows that DFS’s cur­rent val­u­a­tion (stock price of $21.80) implies that the company’s prof­its will decline by 40% and never grow again.
2. Eco­nomic earn­ings are growing faster that reported accounting earnings.
3. Free cash flow of $2.8bn or 24% of its enterprise value during the last fiscal year.

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For Ask Matt readers: Abbot Laboratories (ABT) – Attractive Rating

HIDDEN GEM: ABT’s current stock price (~$45 per share) implies the company’s profits will permanently decline by 20%. In other words, the market is not only giving no credit for future profit growth, it is predicting a significant (20%) decline in profits.

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Hedge Against A Market Sell-Off; Sell NYSE Euronext (NYX)

Misleading earnings: NYX reported a $957mm increase in GAAP earnings while our model shows economic earnings declined by $641mm (a difference of $1,599mm or 34% of 2009 revenues during the last fiscal year. The majority of this disconnect comes from asset-write offs of $1,249mm, which equals 12% of reported net assets.

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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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