Identifying Good And Bad Activist Investors

There are some genuinely good examples of shareholder activism out there. In the right context, activist investors hold management accountable and play a beneficial role in the market by ensuring that poor corporate governance and strategy don’t persist.

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Free Cash Flow (FCF): Explanation & Examples

There are many ways to calculate free cash flow. Most approaches are short cuts to our more comprehensive approach to the calculation. The formula for FCF can be seen in Figure 1. For more on FCF, see within.

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Economic Earnings: Explanation & Examples

To derive economic earnings, 30+ adjustments must be made to accounting earnings. These adjustments remove items hidden in the footnotes and MD&A of annual filings and close loopholes within GAAP accounting.

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Return On Invested Capital (ROIC): Explanation & Examples

The formula (see Figure 1) for calculating ROIC is easy. The hard part is finding all the data, especially from the footnotes and MD&A, required to get NOPAT and Invested Capital right. When we calculate ROIC, we make numerous adjustments to close accounting loopholes and ensure apples-to-apples comparability across thousands of companies.

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David Trainer Explains Why Suspended Ratings Are In The Danger Zone


CEO David Trainer sat down with Chuck Jaffe of Money Life and to talk about our Danger Zone pick this past week: Danger Zone: Suspended Ratings.

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Danger Zone: Suspended Ratings


We suspend our ratings on certain stocks when we feel the company’s latest reported financials are no longer reliable or indicative of the risk/reward of the stock. For example, an announcement of an acquisition or spin-off means the current financial statements could change significantly.

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4 Reasons ROE Is Not A Useful Metric For Investors


Recently, we ran through the various flaws in the price to earnings ratio and explained why investors need to be paying more attention to return on invested capital (ROIC). This week, we’re tackling another of the market’s favorite metrics, return on equity (ROE). Return on equity has a very simple formula: It’s tempting to think…

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The Market Values High ROIC Companies


Last month, Fortune released its list of the top 50 businesspeople of the year. The recognition these CEO’s are receiving shows that the market cares about ROIC, even if many investors aren’t explicitly talking about it.

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What’s Behind Apple’s Recent Selloff?


New Constructs CEO David Trainer appeared on CNBC’s Closing Bell this afternoon to talk about the future potential of Apple.

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Ranked: Our Top 10 ETFs


The following is a list of our top 10 ETFs that have over $100 million in assets under management (AUM), and that are not leveraged.

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Making a Balance Sheet Useful


We’ve compiled a “Top 11” list of the companies (who have already filed for 2014) with the largest adjustments to their balance sheets across the 11 adjustments we make.

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Do Microsoft Bulls Have A Convincing Case?


MSFT currently earns our Neutral rating, but if new CEO Satya Nadella can halt the company’s declining return on invested capital (ROIC), the stock’s valuation is cheap enough to make it intriguing.

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Amazon’s New Smartphone Spells Trouble for Apple (AAPL)


A high quality smartphone from Amazon that undercuts higher-priced competitors could mean more serious trouble for Apple’s iPhone and the company’s declining profit margins.

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Netflix (NFLX): Even More Dangerous


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Apple’s Declining Advantage is Undeniable


Apple cannot have pricing power and market share at the same time. No one can for an extended period of time. The problem with AAPL is that it is priced for the company to achieve market share penetration and growth at high prices. The reality is that the quality of Apple products versus competitors is declining. Prices will have to come down just to maintain market share.

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CNBC Interview: Confirming AAPL Thesis – Apple Is Still Rotten

Here’s my latest CNBC interview on my Apple (AAPL) thesis, originally articulated in Danger Zone 5/13/2013: Apple Inc. (AAPL).

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Apple Stays Rotten


The “value” in Apple is an illusion. Astute investors need to look at Apple through the lens of what is a reasonable ROIC in the future.

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Danger Zone 9/16/13: E*Trade Babies


Online trading firms aim to exploit the gullibility of many retail investors by encouraging the myth that they can outperform professional money managers armed with vastly greater resources, experience and expertise. The E*Trade babies are the most glaring symbol of this myth. The symbol also reinforces the notion that investing is an easy task that takes no special effort or aptitude to succeed.

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Excess Cash – Valuation Adjustment

excess cash

For most companies, we estimate the required amount of cash for normal business operations to be around 5% of sales. However, many companies hold cash or other liquid investments above and beyond this amount. We refer to this extra amount as excess cash. This surplus cash can be used for any number of purposes, including acquisitions, research and development, and cushioning the company against economic downturns. Excess cash is immediately available for distribution to shareholders, so we add a company’s excess cash to our calculation of shareholder value.

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Excess Cash – Invested Capital Adjustment


Most companies hold some cash—or cash equivalents in the form of investments—above this required amount. Companies hold excess cash in order to cushion against economic downturns, prepare for acquisitions, or any number of other reasons. Sometimes, past profits pile up on balance sheets and are a form of excess cash. Excess cash is not needed for the operations of a company. It is removed from our calculation of invested capital.

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