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Drugstore.com Inc (DSCM) — Dangerous Rating, free report for Ask Matt Readers

Thursday, September 30th, 2010 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

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Munger on Accountants: “Utterly failed us…and no sign of reversal of the failure”

Tuesday, September 28th, 2010 Munger on Accountants: “Utterly failed us…and no sign of reversal of the failure”

The reason we focus on Economic Earnings as opposed to Accounting Earnings is because Accounting Earnings are subject to too much manipulation – as Charlie Munger states below. This problem is not going away anytime soon.

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Munger on Wall Street: Easy Money Corrupts

Tuesday, September 28th, 2010 Munger on Wall Street: Easy Money Corrupts

The Munger version of that is “easy money corrupts, and really easy money tends to corrupt absolutely.”

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XBRL: Digitial Needles In the Digital Haystack

Tuesday, September 28th, 2010 XBRL: Digitial Needles In the Digital Haystack

We have always known that finding data is the Footnotes is, for most investors who are without our patented Research Platform, like searching for needles in a haystack. With XBRL, the only difference is now investors can search for digital needles in a digital haystack. Funny how little things change.

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

Tuesday, September 28th, 2010 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.

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Stock Pick of the Week: Sell/Short CBS Class B (CBS) Very Dangerous Rating

Tuesday, September 21st, 2010 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.

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icad Inc (ICAD) — free report for Ask Matt, Dangerous Rating

Tuesday, September 21st, 2010 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

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Stock-Picking Matters More Than Ever

Friday, September 17th, 2010 Stock-Picking Matters More Than Ever

As follow-on to my 3-part Market Outlook series of posts, I am highlighting a quote from GaveKal research’s Daily note today which supports my assertion that the “Easy Money Days Are Over” and that success in stock-picking will rely on superior analytical skills as opposed to the market-timing skills that have predominated most of the past 25 years (see Market Outlook Part 1: Rise of the Speculative Movement).

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Stock Pick of the Week: Buy Seagate Technology (STX) – Very Attractive Rating

Tuesday, September 14th, 2010 Stock Pick of the Week: Buy Seagate Technology (STX) – Very Attractive Rating

HIDDEN GEM: Our detailed dis­counted cash flow analy­sis shows that STX’s cur­rent val­u­a­tion (stock price of $11.24) implies that the company’s prof­its will decline by 80% and never grow again. Our eco­nomic earn­ings model shows prof­its are grow­ing, not declin­ing, which makes the Risk/Reward for STX Very Attractive.

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Stock Pick of the Week: Sell/Short Capital One Financial (COF)

Tuesday, September 7th, 2010 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.

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Citigroup — free report for Ask Matt, Dangerous Rating

Friday, September 3rd, 2010 Citigroup — free report for Ask Matt, Dangerous Rating

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.

RED FLAGS:

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)

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Market Outlook Part 3: How To Be Successful Post the Speculative Movement

Thursday, September 2nd, 2010 Paradise Lost

The end of the Speculative Movement and the momentum-investing fad means we are entering an environment more conducive to value investing or, more specifically, an environment where skill in assessing the true economic profitability and valuation of companies will determine the success of stock-pickers.

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Market Outlook Part 2: The End of the Speculative Movement

Thursday, September 2nd, 2010 Speculators Paradise Is Over

I believe that most of the traders and speculators who have been successful enough to stay afloat will be forced to exit the business or shift to a value investment style – an endeavor in which I expect very, very few to be successful. And though there will be fewer speculators, enough will remain to keep the markets from being too efficient.

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Market Outlook Part 1: Rise of the Speculative Movement

Thursday, September 2nd, 2010 Speculator's Paradise

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.

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Hewlett-Packard Co (HPQ) — free report for Ask Matt, Attractive Rating

Wednesday, September 1st, 2010 Hewlett-Packard Co (HPQ)   — free report for Ask Matt, Attractive Rating

HIDDEN GEM: Our discounted cash flow analysis shows that HPQ’s current valuation (stock price of $38.45) implies that the company’s profits will decline by 20% and never grow again.

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