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Highlights From New Constructs Investment Research

Stock Pick of the Week: Sell/Short Discover Financial Services (DFS) – Very Dangerous Rating

Stock Pick of the Week: Sell/Short Discover Financial Services (DFS) – Very Dangerous Rating Read More

RED FLAGS:
1. Mis­lead­ing earn­ings: DFS reported a $295mm increase in GAAP earn­ings while our model shows eco­nomic earn­ings declined by $998mm (a dif­fer­ence of $1,293mm or over 100% of reported net income). The majority of the overstated reported earnings comes from a one-time gain from an anti-trust settlement of $1,892mm.
2. Very dan­ger­ous val­u­a­tion: stock price of $19 implies DFS must grow its NOPAT at over 10% com­pounded annu­ally for 40 years. A 40-year growth appre­ci­a­tion period with a 10%+ com­pound­ing growth rate sets expectations for future cash flow performance quite high. Historical growth rates have never been much lower.
3. Free Cash Flow was -$2,470mm or -26% of the company’s enterprise value last year.
4. Asset write-offs of $428mm or 5% of net assets – this means that management has written off at least $0.05 of assets for every $1 on the current balance sheet. Writing off assets is the opposite of creating shareholder value as it reflects management’s inability to derive any profits for the investments it makes with shareholder funds.
5. Off-balance sheet debt of $38mm or 0.5% of net assets.
6. Outstanding stock option liability of $8mm or less than 1% of current market value.

Stock Pick of the Week: Buy Analog Devices Inc (ADI) – Very Attractive Rating

Stock Pick of the Week: Buy Analog Devices Inc (ADI) – Very Attractive Rating Read More

HIDDEN GEMS:
1. About $15 million in non-operating expenses (after-tax) cause reported earnings to be understated.
2. Our dis­counted cash flow analy­sis shows that ADI’s cur­rent val­u­a­tion (stock price of $37.18) implies that the company’s prof­its will decline by 10% and never grow again.
3. The com­pany grew its eco­nomic earn­ings by $283mm dur­ing its last fis­cal year.
4. Excess cash of $2,462.5mm or nearly 25% of its market cap

Tech and Pharma Stocks Are “Most Attractive” for December

Tech and Pharma Stocks Are “Most Attractive” for December Read More

The Decem­ber ver­sion of our Most Attrac­tive Stocks report is now avail­able. Note that Barron’s recently rec­og­nized our Most Attrac­tive… Read more >>

REITs and Financial Stocks Are “Most Dangerous” for December

REITs and Financial Stocks Are “Most Dangerous” for December Read More

The December version of our Most Attractive Stocks and Most Dangerous Stocks reports are now available for purchase. Note that Barron’s recently recognized our Most Attractive Stocks portfolio as #1 over the prior 12 months amongst the best of the Wall Street research firms.

Fundamental Research for ETFs & Mutual Funds: Look Out Morningstar

dreamstimefree_2063017_kidInTuxPointingOminously Read More

Ever wondered what it would be like to evaluate funds and ETFs with the same rigor that you can evaluate individual stocks – that is exactly what we deliver in the our Mutual Fund Rating and ETF Reports. Samples provided

The Leak on WikiLeaks – Regulators Knew About Risks That Led to Financial Fallout

The Leak on WikiLeaks – Regulators Knew About Risks That Led to Financial Fallout Read More

While I cannot predict what WikiLeaks will leak about some major banks, I have a hunch that one of the revelations might be from a special New Constructs report provided to the Senate Banking Committee’s Subcommittee on Securities, Insurance, and Investment.