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Buy The Travelers Co (TRV) – Very Attractive Rating

HIDDEN GEMS: 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.
by David Trainer, Founder & CEO
New Constructs
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Stock Pick of the Week: Buy Colgate-Palmolive Co (CL) – Very Attractive Rating

HIDDEN GEMS: 1. About $250 million in non-operating expenses (after-tax) cause reported earnings to be understated during the last fiscal year. 2. Our discounted cash flow analysis shows that CL’s current valuation (stock price of $77.52) implies that the company’s profits will decline by 7% and never grow again. 3. The company grew its economic earnings by $229mm (14% increase) during its last fiscal year.
by David Trainer, Founder & CEO
New Constructs
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Stock Pick of the Week: Short Rackspace Hosting Inc (RAX) – Ignore the Takeover Hype

RED FLAGS: 1. Mis­lead­ing Earn­ings: RAX reported a $30mm increase in GAAP earn­ings while our model shows eco­nomic earn­ings declined by $13mm (a dif­fer­ence of $43mm or 7% of rev­enue). 2. Very Dan­ger­ous Val­u­a­tion: Stock price of $25.636 implies RAX must grow its NOPAT at 25% com­pounded annu­ally for 17 years. A 17-year Growth Appre­ci­a­tion Period with a 25% com­pound­ing growth rate is quite a high stan­dard to beat, as per my post on How To Make Money Pick­ing Stocks. 3. Outstanding Stock Option Liability of $205mm or 6.5% of current market value
by David Trainer, Founder & CEO
New Constructs
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Stock Pick of the Week: Buy Bristol Myers Squibb Co (BMY) – Very Attractive Rating

HIDDEN GEMS: 1. Our dis­counted cash flow analy­sis shows that BMY’s cur­rent val­u­a­tion (stock price of $27.16) implies that the company’s prof­its will decline by 35% and never grow again. 2. The com­pany grew its eco­nomic earn­ings by $307.5mm (12% increase) dur­ing its last fis­cal year. 3. The com­pany has $9,507mm in Excess Cash, which we remove from our Invested Cap­i­tal cal­cu­la­tion. $9,507mm mil­lion is more than 20% of BMY’s market cap.
by David Trainer, Founder & CEO
New Constructs
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Stock Pick of the Week: Sell/Short CB Richard Ellis Group, Inc. (CBG) — Very Dangerous Rating

RED FLAGS: Mis­lead­ing Earn­ings: CBG reported a $1,045mm increase in GAAP earn­ings while our model shows eco­nomic earn­ings declined by $358mm. Very Dan­ger­ous Val­u­a­tion: Stock price of $19.06 implies CBG must grow its NOPAT at 20% com­pounded annu­ally for 15 years. Has any company ever done that, much less a commercial real estate company?
by David Trainer, Founder & CEO
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Stock Pick of the Week: Buy Schiff Nutrition Intl (WNI) — Very Attractive Rating – Small Cap Special

HIDDEN GEMS: 1. Our dis­counted cash flow analy­sis shows that WNI’s cur­rent val­u­a­tion (stock price of $7.89) implies that the company’s prof­its will decline by 25% and never grow again. 2. The com­pany grew its economic earnings more than its reported earnings. Economic earnings rose by $9.1mm (506% increase) while Net Income rose by only $8.1mm (79% increase) during its last fiscal year. 3. The com­pany has $42mm in Excess Cash, which we remove from our Invested Cap­i­tal cal­cu­la­tion. $42 mil­lion is 20% of WNI’s mar­ket cap.
by David Trainer, Founder & CEO
New Constructs
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Rite Aid Corp (RAD) — Dangerous Rating, free report for Ask Matt Readerss

Rite Aid Corp (RAD) gets a Dan­ger­ous Rat­ing because of these RED FLAGs: 1. Very Expen­sive val­u­a­tion: cur­rent stock price implies the com­pany will grow revenues and NOPAT at 6% com­pounded annu­ally for the next 15 years while also more than doubling ROIC from 6.1% to 13.7% within the same time frame. 2. Off Balance-Sheet debt: of $5,502mm or 93% of "Reported" Net Assets 3. Asset-write-offs: $3,417mm or 58% of "Reported" Net Assets
by David Trainer, Founder & CEO
New Constructs
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Buy MSFT: Goldman Downgrade Presents Opportunity

We reiterate our pick for last week's Stock Pick of the Week: Buy Microsoft Corp (MSFT) — Very Attractive Rating. We consider the recent downgrade from Goldman an investment-banking driven head fake. Because MSFT is not a good investment banking client (very little merger or stock offering activity), investment banks have little to lose by downgrading or putting a sell rating on the this stock.
by David Trainer, Founder & CEO
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Drugstore.com Inc (DSCM) — Dangerous Rating, free report for Ask Matt Readers

Drugstore.com (DSCM) gets a Dan­ger­ous Rat­ing because of these RED FLAGs: 1. Very Expen­sive val­u­a­tion: cur­rent stock price implies the com­pany will grow rev­enues at 20% com­pounded annu­ally for the next 15 years while also improv­ing ROIC from –2.3% to 10.9% within the same time frame. 2. Off Balance-Sheet debt: of $15mm or 15% of Net Assets 3. Asset-write-offs: $210mm or 206% of Net Assets
by David Trainer, Founder & CEO
New Constructs
1Comments

Stock Pick of the Week: Buy Microsoft Corp (MSFT) — Very Attractive Rating

HIDDEN GEMS: 1. Our dis­counted cash flow analy­sis shows that MSFT’s cur­rent val­u­a­tion (stock price of $24.73) implies that the company’s prof­its will decline by 20% and never grow again. 2. The company has $43,292mm in Excess Cash (over 20% of the market cap), which we remove from our Invested Capital calculation and which helps drive a whopping 61.6% ROIC. 3. Our eco­nomic earn­ings mod­els shows prof­its are grow­ing, not declin­ing, which makes the Risk/Reward for MSFT Very Attractive.
by David Trainer, Founder & CEO
New Constructs
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Stock Pick of the Week: Sell/Short CBS Class B (CBS) Very Dangerous Rating

CBS’s get our Very Dan­ger­ous Rating. 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. RED FLAGS: 1. Mis­lead­ing Earn­ings: CBS reported a $11,899mm increase in GAAP earn­ings while our model shows eco­nomic earn­ings declined by $548mm. 2. Underfunded Pensions of $2,239mm (20% of market value) 3. Asset-write-offs of $10,559mm in asset write-offs (50% of Net Assets and nearly 100% of the market value) 4. High Valuation: market price implies CBS must grow its revenue at 10% com­pounded annu­ally for 23 years and increase its ROIC from 2.4% to 6% over the same time frame.
by David Trainer, Founder & CEO
New Constructs
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icad Inc (ICAD) — free report for Ask Matt, Dangerous Rating

icad (ICAD) gets a Dan­ger­ous Rat­ing because of these RED FLAGs: 1. Very Expensive valuation: current stock price implies the company will grow revenues at 20% compounded annually for the next 10 years while also improving ROIC from -3.7% to 1.5% within the same time frame. 2. Option Liabilities: of $2.1mm or 3% of the current market value 3. Asset-write-offs: $4.4mm or 7% of Net Assets
by David Trainer, Founder & CEO
New Constructs
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Stock Pick of the Week: Sell/Short Capital One Financial (COF)

The Risk/Reward of invest­ing in Capital One’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. RED FLAGS: 1. Mis­lead­ing Earn­ings: COF reported a $399mm increase in GAAP earn­ings while our model shows eco­nomic earn­ings declined by $1,783mm. 2. The company’s ROIC is in the Bot­tom Quin­tile of all the com­pa­nies we cover. 3. Stock price of $40.69 implies COF must grow its NOPAT at 15% com­pounded annu­ally for 15 years.
by David Trainer, Founder & CEO