Dangerous Rating with several RED FLAGS. See my recent post Mayo Is Right about Citi for details on our analysis of the company’s loose Deferred Tax accounting and other Red Flags. There are other reasons to run from this stock.
Over $7bn in off-balance sheet debt
$2.2bn in under-funded Pension liabilities
Over $10bn in Asset write-offs
Very Dangerous valuation (detail follow)
Since the early 1990s, we have seen huge growth in the number of speculators and their impact on the market. Belief that it was easy to make money in the stock market was the primary driver of this boom in speculation. As shown in Exhibit 1, it was VERY easy to make money in the equity markets from 1986 to 1999.
HIDDEN GEM: Our detailed discounted cash flow analysis shows that MDT’s current valuation (stock price of $31.95) implies that the company’s profits will decline by 50% and never grow again. Our economic earnings model shows profits are growing, not declining, which makes the Risk/Reward for MDT Very Attractive.
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.
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.
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.
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:
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?