Filing Season Finds: Wednesday, February 22

Yesterday, our analysts parsed 56 filings and collected 7,941 data points. In total, they made 1,335 adjustments with a dollar value of $351 billion. In particular, analyst Hunter Gray found an unusual item in Phillips 66’s (PSX) 10-K.

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“This is the earnings metric stock-market investors should focus on”


On Wednesday ( 10/12/16) our op-ed article was published at Marketwatch. The article explains why investors need to look past common metrics such as EPS or non-GAAP earnings

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Danger Zone: Zoe’s Kitchen (ZOES)


Declining economic earnings, weak competitive position, and an overvalued stock land Zoe’s Kitchen (ZOES) in the Danger Zone this week.

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Danger Zone: 8×8 (EGHT)


This week’s Danger Zone is a company that claims consistent profitability and continued success, despite years of shareholder value destruction. Misleading non-GAAP results, large losses, and an overvalued stock price land 8×8 in the Danger Zone.

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Danger Zone: Interactive Intelligence (ININ)


But what happens when a once profitable company makes the transition to the cloud and has become largely unprofitable? That company, Interactive Intelligence (ININ) is in the Danger Zone this week.

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The SEC Is Starting To Worry About Non-GAAP Earnings


We’ve been sounding the alarm on non-GAAP earnings for several years now. Companies exploited the wide leeway granted by the SEC to present their business in a more favorable light.

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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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Danger Zone: Compensation Committees


We know that Valeant is not the only company with misaligned executive incentives. There are many others, many of which have already been put in the Danger Zone and some who will go into the Danger Zone soon. This week, however, compensation committees land in the Danger Zone because of the role they play in creating the problems that lead to shareholder value destruction.

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Danger Zone: Valeant Pharmaceuticals (VRX)


We’ve been highlighting the dangers of Valeant for over two years and we do not see them abating. As long as management is incentivized to destroy shareholder value, Valeant is in the Danger Zone.

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The Ugly Truth About Netflix: Investors Beware


It is almost becoming an expected event every quarter: Netflix releases quarterly earnings amid much speculation about its future, and the price soars.

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How to Value a Stock, Step 3: Economic Earnings


This article is the third in a four part series that walks readers through how to rate and value a stock. Our third step to gauge the value of a company is to determine its economic earnings.

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GAAP Opinion versus Economic Fact

GAAP financial statements generally fail to meet equity investors’ analytical needs. We try to calculate something that does.

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July’s Most DANGEROUS Stocks Available to the Public

New Constructs released July’s Most Dangerous Stocks report to the public today.

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Off-Balance Sheet Debt – Invested Capital Adjustment


Investors who ignore off-balance sheet debt are not holding companies accountable for all of the capital invested in their business. By adding back off-balance sheet debt to invested capital, one can get a true picture of the value that management is creating for shareholders. Diligence pays.

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Footnotes Adjustments for Earnings & Valuation Diligence

This article details the uniquely rigorous diligence behind each of our ratings on 3000 stocks, 7000 mutual funds and 400 ETFs. It contains reports on all the adjustments we make to convert GAAP data to economic earnings and derive true shareholder value in a discounted cash flow model.

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Implied Interest For Operating Leases – NOPAT Adjustment


Converting GAAP data into economic earnings should be part of every investor’s diligence process. Performing detailed analysis of footnotes and the MD&A is part of fulfilling fiduciary responsibilities.

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Non-Operating Income Hidden in Operating Earnings – NOPAT Adjustment


Non-operating items in operating income are unusual gains that don’t appear on the income statement because they are bundled in other line items. Without careful footnotes research, investors would never know that these non-recurring income items distort GAAP numbers by artificially raising operating earnings.

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February’s Most DANGEROUS Stocks Available to the Public

New Constructs released February’s Most Dangerous Stocks report to the public today.

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Top Stock Picks & Shorts: Moneylife Radio Interview w/ Chuck Jaffe

Listen in on my 15 minute interview describing the rigorous diligence New Constructs applies to every rating on the stocks, ETFs and mutual funds we cover.

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Bank Of America (BAC): Very Dangerous Rating — for Ask Matt Readers

Bank Of America (BAC) gets our Very Dangerous rating because it has misleading earnings and a very expensive valuation. Here is my free report on BAC.

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