Market Outlook Part 3: How To Be Successful Post the Speculative Movement

Paradise Lost

The end of the Speculative Movement and the momentum-investing fad means we are entering an environment more conducive to value investing or, more specifically, an environment where skill in assessing the true economic profitability and valuation of companies will determine the success of stock-pickers.

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Market Outlook Part 2: The End of the Speculative Movement

Speculators Paradise Is Over

I believe that most of the traders and speculators who have been successful enough to stay afloat will be forced to exit the business or shift to a value investment style – an endeavor in which I expect very, very few to be successful. And though there will be fewer speculators, enough will remain to keep the markets from being too efficient.

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Market Outlook Part 1: Rise of the Speculative Movement

Speculator's Paradise

Since the early 1990s, we have seen huge growth in the number of speculators and their impact on the market. Belief that it was easy to make money in the stock market was the primary driver of this boom in speculation. As shown in Exhibit 1, it was VERY easy to make money in the equity markets from 1986 to 1999.

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Hewlett-Packard Co (HPQ) — free report for Ask Matt, Attractive Rating

HIDDEN GEM: Our discounted cash flow analysis shows that HPQ’s current valuation (stock price of $38.45) implies that the company’s profits will decline by 20% and never grow again.

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Mayo Is Right About Citigroup

A large write-down of its deferred tax assets could be devastating for Citi–over 30% of its total book value is comprised of net deferred tax assets. Our detailed analysis of the Notes to the Financial Statements also found these RED FLAGS :

1. Over $7bn in off-balance sheet debt
2. $2.2bn in under-funded Pension liabilities
3. Over $10bn in Asset write-offs

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Stock Pick of the Week: Buy Medtronic Inc. (MDT) – Very Attractive Rating

HIDDEN GEM: Our detailed discounted cash flow analysis shows that MDT’s current valuation (stock price of $31.95) implies that the company’s profits will decline by 50% and never grow again. Our economic earnings model shows profits are growing, not declining, which makes the Risk/Reward for MDT Very Attractive.

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JDS Uniphase Cp (JDSU) — free report for Ask Matt, Dangerous Rating

RED FLAG: Our analy­sis of the Finan­cial Foot­notes reveals: the com­pany has writ­ten off over $60bn in assets over the last twelve years. That is a big num­ber com­pared to the company’s mar­ket cap of roughly $2.2bn and its net assets of about $1.3bn. This results in economic earnings of -$5,346mm compared to Net Income of -$866mm during the last fiscal year. For details on what causes the dif­fer­ence between Eco­nomic Ver­sus Account­ing Prof­its, see Appen­dix 3 on page 10 of our free report on JDSU.

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McDonalds Corp (MCD) – free report for Ask Matt, Very Attractive Rating

HIDDEN GEM: Our detailed val­u­a­tion model shows that MCD grew its “eco­nomic” prof­its more than it account­ing prof­its dur­ing its last fis­cal year. Eco­nomic prof­its rose by $272mm while account­ing prof­its rose by $238mm. For details on what causes the dif­fer­ence between Eco­nomic Ver­sus Account­ing Prof­its, see Appen­dix 3 on page 10 of our free report on MCD.

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Stock Pick of the Week: Sell/Short FedEx Corp (FDX)

RED FLAG: The main driver of the difference between Economic and Accounting earnings is FDX’s $11.9bn of off-balance sheet debt, a big number compared to $19.7bn in Net Assets and $25.6bn of market value.

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Sandridge Energy (SD) – Free Report, for Ask Matt Readers, Highlighting a Major Red Flag in the Footnotes

Here is our free report on Sandridge Energy for Ask Matt readers. Our analysis of the Financial Footnotes reveals a major RED FLAG: the company has written off over $3.4bn in assets in just the last two years.

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Stock Pick of the Week: Buy International Business Machines (IBM)

HIDDEN GEM: Our detailed valuation model shows that IBM grew its “economic” profits more than it accounting profits during its last fiscal year. Economic profits rose by $1.15bn while accounting profits rose by $1.09bn.

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Wall Street Research Cannot Be Trusted – Proof Point

In case you needed proof beyond the Global Research Settlement that Wall Street research cannot be trusted, Morgan Stanley delivers by admitting “inadequately disclosing conflicts of interest on the part of its research analysts.”

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Economic Versus Accounting Earnings

Accounting data was not designed for equity investors, but for debt investors. “Earnings, earnings per share and earnings growth are misleading measures of corporate performance.”(from page 66 in The Quest For Value by Bennett Stewart, Harper Collins 1991.)

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Stock Pick of the Week: Sell/Short Yahoo (YHOO)

Overall, the Risk/Reward of investing in Yahoo’s stock looks Very Dangerous to me. There is lots of downside risk given the Misleading Earnings and there is little upside reward given the already-rich expectations embedded in the stock price.

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Top Ranking for Stock Picking for New Constructs

New Constructs stock-picking consistently ranks among the best of the nationally-recognized research firms.

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Stock Pick of the Week: Buy Xilinx (XLNX)

HIDDEN GEM: Our detailed valuation model shows that XLNX grew its “economic” profits by nearly $14mm during its last fiscal year while it reported an $18mm decline in accounting profits.

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Proof Is In Our Performance

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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New Constructs Receives Patent on Research System

The United States Patent and Trademark Office awarded us patent #7,752,090, titled: System and Method For Reversing Accounting Distortions and Calculating A True Value of a Business.

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Stock Pick of the Week: Sell/Short Whole Foods Market (WFMI)

One of the Most Dangerous Stocks for July, Whole Foods has misleading earnings and a sky-high valuation, in our opinion. The same is true for all of our Most Dangerous Stocks.

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Good Place to Track Hedge Fund Returns

Boomerang Capital Partners provides a great resource for tracking and benchmarking investment returns for hedge funds in general and the many different hedge fund strategies. Here is the link to the page where they offer a free report called the Periodic Table of Hedge Fund Returns.

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