As a follow up to our Danger Zone article on May 20th, 2013, we review the “cash flow” thesis proffered by Jeff Bezos and Amazon (AMZN) bulls.
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.
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.
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.
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.
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.
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.)
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.
New Constructs stock-picking consistently ranks among the best of the nationally-recognized research firms.
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.
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.
A newcomer to our Most Attractive Stocks for July, this small cap stock has an excellent risk/reward profile, which earns it our highest Rating: Very Attractive.
As highlighted in LPL Group excellent “Mid-Year Outlook for 2010″, the economy is moving from ‘recovery’ mode to ‘expansion’ mode, which is very different from moving from ‘recovery’ back to ‘recession’ – a prediction made by many attention-seeking alarmists these days. We are still growing, just not as fast.
Here is a free copy of our report on SCHW for Ask Matt readers. This report provides details behind Matt’s analysis of SCHW in his recent article in USA Today: “Charles Schwab stock: Too close to call.” Click here for our report: Charles Schwab Corp (SCHW) Neutral Risk/Reward Rating
The difference between Investing and Speculating is much larger than Wall Street would have you believe. In fact, they could not be too more different activities. Speculating is gambling. Investing is intelligent decision-making.
Hidden Gem – GPS: economic earnings are rising faster than reported accounting earnings b/c the company lowered the capital employed to run the business. GAAP earnings do not capture increase capital efficiency of the business.
TheStreet.com recently published three articles quoting me on SIRI. Andrea Tse called and, after reviewing our models on SIRI, I told her that the stock was Dangerous because:
There are two primary reasons a stock gets on our Most Dangerous List:
1. Misleading earnings: reported GAAP earnings are positive and rising while economic earnings are negative and declining
2. Expensive valuation: future cash flow expectations embedded in the current price are unusually high especially compared to historical performance.
Free copy of our report on NYX is in the Free Archive on www.newconstructs.com. Or just click here: NYX Company Valuation Report.
Even if you think my analytical methods are bunk, you will still appreciate the performance of New Constructs stock picking. To see how we’ve done…
The best strategy for making money in stocks is “buy low expectations & sell high expectations.” Sounds easy — but if it was easy, everyone would do it, right?
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