It is almost becoming an expected event every quarter: Netflix releases quarterly earnings amid much speculation about its future, and the price soars.
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.
GAAP financial statements generally fail to meet equity investors’ analytical needs. We try to calculate something that does.
New Constructs released July’s Most Dangerous Stocks report to the public today.
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.
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.
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.
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.
New Constructs released February’s Most Dangerous Stocks report to the public today.
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.
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.
David A. Geracioti, Editor-In-Chief of Registered Rep magazine, recently invited me for an interview on why economic earnings matter when selecting stocks, mutual funds and ETFs.
Most of my research and publishing tends to focus on companies manipulating accounting rules to make their reported earnings look better than the real economic cash flows of their business.
It is unfortunately rare that I find a company whose economic earnings are outpacing the reported accounting results and whose stock is cheap.
One such company is Lam Research (LRCX – very attractive rating). One of September’s most attractive stocks, LRCX offers investors hidden value.
It is only a matter of time before oil and gas stocks stop moving with the price of oil and start reflecting their underlying economics.
When this happens, Baker Hughes (BHI – “very dangerous” rating) will be among the stocks that fall the hardest.
The valuation of NUE’s stock implies the company will grow its after-tax cash flow (NOPAT) by nearly 20% compounded annually for 20 years.
PowerShares Buyback Achievers (PKW) is the #1 “most attractive” ETF out of the 375+ ETFs we ranked according to our predictive rating system.
When Morgan Stanley (MS) started in 1935, there were around fifteen employees. For 2010, the company reported 62,542 employees. Bigger is not always better. And for big, publicly-traded companies, big tends to be worse especially when it comes to financial reporting.
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.
1. Our discounted cash flow analysis shows that APOL’s current valuation (stock price of $42.31) implies that the company’s profits will decline by 60% and never grow again.
2. Economic earnings are higher than reported accounting earnings.
3. Excess cash of $1,201mm or about 20% of its market cap
January’s Most Attractive Stocks are now available. Technology and Pharmaceutical stocks predominate compared to other sectors. One newcomer to the list, Seagate Technology (STX), is actually an old friend. STX made our subscribers a lot of money when the stock jumped on acquisition speculation last fall. After that jump, the stock was too expensive to…
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