New Constructs
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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
by David Trainer, Founder & CEO
New Constructs
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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.
by David Trainer, Founder & CEO
New Constructs
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Buy The Travelers Co (TRV) – Very Attractive Rating

HIDDEN GEMS: 1. About $29 million in non-operating expenses (after-tax) cause reported earnings to be understated. 2. Our dis¬counted cash flow analy¬sis shows that TRV’s cur¬rent val¬u¬a¬tion (stock price of $55.49) implies that the company’s profits will decline by 30% and never grow again. 3. The company grew its economic earn¬ings by $827mm during its last fiscal year.
by David Trainer, Founder & CEO
New Constructs
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Stock Pick of the Week: Akamai Technologies Inc (AKAM) – Very Dangerous Rating

RED FLAGS: 1. Misleading Earnings: AKAM reported a $1mm increase in GAAP earnings while our model shows economic earnings declined by $10mm (a difference of $11mm or 7% of reported net income). 2. Very Dangerous Valuation: Stock price of $47 implies AKAM must grow its NOPAT at over 20% com¬pounded annu¬ally for 15 years. A 15-year growth appreciation period with a 20%+ compounding growth rate sets expectations for future cash flow performance quite high. 3. Asset write-offs of $2,000mm or 102% of Net Assets – this means that management has written off at least $1 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. 4. Off-balance sheet debt of $128mm or 7% of Net Assets. 5. Outstanding Stock Option Liability of $212mm or 3% of current market value.
by David Trainer, Founder & CEO
New Constructs
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S&P 500 Is Fully Valued

The Risk/Reward of the entire S&P 500 gets our Neutral Rat­ing. Our recently pub­lished Index Bench­mark report on the S&P 500 offers unique insights into the under­ly­ing prof­itabil­ity and val­u­a­tion of all the com­pa­nies com­prised by this index. It also offers bench­marks for (1) investors con­sid­er­ing buy­ing ETFs or Index Funds based on the S&P 500 and for (2) com­par­ing indi­vid­ual stocks to the S&P 500.
by David Trainer, Founder & CEO
New Constructs
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Small Cap Stocks Are Dangerous

The Risk/Reward of the entire Russell 2000 gets our Dangerous Rating. Our recently published Index Benchmark report on the Russell 2000 offers unique insights into the underlying profitability and valuation of all the companies comprised by this index. It also offers benchmarks for (1) investors considering buying ETFs or Index Funds based on the Russell 2000 and for (2) comparing individual stocks to the Russell 2000.
by David Trainer, Founder & CEO
New Constructs
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Stock Pick of the Week: Buy Colgate-Palmolive Co (CL) – Very Attractive Rating

HIDDEN GEMS: 1. About $250 million in non-operating expenses (after-tax) cause reported earnings to be understated during the last fiscal year. 2. Our discounted cash flow analysis shows that CL’s current valuation (stock price of $77.52) implies that the company’s profits will decline by 7% and never grow again. 3. The company grew its economic earnings by $229mm (14% increase) during its last fiscal year.
by David Trainer, Founder & CEO
New Constructs
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Stock Pick of the Week: Short Rackspace Hosting Inc (RAX) – Ignore the Takeover Hype

RED FLAGS: 1. Mis­lead­ing Earn­ings: RAX reported a $30mm increase in GAAP earn­ings while our model shows eco­nomic earn­ings declined by $13mm (a dif­fer­ence of $43mm or 7% of rev­enue). 2. Very Dan­ger­ous Val­u­a­tion: Stock price of $25.636 implies RAX must grow its NOPAT at 25% com­pounded annu­ally for 17 years. A 17-year Growth Appre­ci­a­tion Period with a 25% com­pound­ing growth rate is quite a high stan­dard to beat, as per my post on How To Make Money Pick­ing Stocks. 3. Outstanding Stock Option Liability of $205mm or 6.5% of current market value
by David Trainer, Founder & CEO
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Red Flag Report: Alternative Fuel Mixture Credit (AFMC) Windfall

The second report in our Red Flag series focuses on a little-known earnings Windfall in the Paper and Products Industry. This report is another example of the deep analysis New Constructs performs on all 3000+ companies under coverage. Our expertise is in navigating poor and confusing disclosure in the Financial Footnotes to find the truth about corporate profitability and valuation.
by David Trainer, Founder & CEO
New Constructs
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Stock Pick of the Week: Buy Bristol Myers Squibb Co (BMY) – Very Attractive Rating

HIDDEN GEMS: 1. Our dis­counted cash flow analy­sis shows that BMY’s cur­rent val­u­a­tion (stock price of $27.16) implies that the company’s prof­its will decline by 35% and never grow again. 2. The com­pany grew its eco­nomic earn­ings by $307.5mm (12% increase) dur­ing its last fis­cal year. 3. The com­pany has $9,507mm in Excess Cash, which we remove from our Invested Cap­i­tal cal­cu­la­tion. $9,507mm mil­lion is more than 20% of BMY’s market cap.
by David Trainer, Founder & CEO