New Constructs
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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 is very expensive. For example, the valuation of the current stock price ($112.16) implies the company will grow its profits at 16% compounded annually for 20 years. The takeaway: there are better stocks to choose from. See details in our free report.
by David Trainer, Founder & CEO
New Constructs
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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.
by David Trainer, Founder & CEO
New Constructs
5Comments

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.
by David Trainer, Founder & CEO
New Constructs
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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.
by David Trainer, Founder & CEO
New Constructs
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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.
by David Trainer, Founder & CEO
New Constructs
2Comments

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.
by David Trainer, Founder & CEO
New Constructs
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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.
by David Trainer, Founder & CEO