New Constructs
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Stock Pick of the Week: Sell/Short Integrated Device Technology, Inc. (IDTI)- Very Dangerous Rating

Of the 561 technology stocks we cover, IDTI is one of the 77 that get our “very dangerous” rating and one of the few that make our most dan­ger­ous stocks list for January. The tech sector is tricky because there are several large-cap excellent stocks (MSFT, ADI and AAPL) that make the sector look very good and offer good hiding for some “very dangerous” smaller-cap stocks such as IDTI.
by David Trainer, Founder & CEO
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Red Flag Report: Hidden Management Failures: Asset-Write Downs

Most investors are not aware of how many corporate managers destroy shareholder value because accounting rules allow them to erase their mistakes from financial statement. A little-known accounting trick called an “asset-write down” allows managers to simply remove assets and shareholders’ equity from the balance sheet as if they never existed. Investors must beware companies that report artificially high profits due to asset-write-down loophole.
by David Trainer, Founder & CEO
New Constructs
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Stock Pick of the Week: Sell/Short BJ’S Restaurants (BJRI)- Very Dangerous Rating

Red flags: 1. Mis­lead­ing earn­ings: BJRI reported a $3mm increase in GAAP earn­ings while our model shows eco­nomic earn­ings declined by $2mm (a dif­fer­ence of $5mm or nearly 40% of reported net income) during the last fiscal year. 2. Very dan­ger­ous val­u­a­tion: stock price of $34 implies BJRI must grow its NOPAT at over 20% com­pounded annu­ally for 15 years. A 15-year growth appre­ci­a­tion period with a 20%+ com­pound­ing growth rate sets expectations for future cash flow performance quite high. Historical growth rates are much lower. 3. Free cash flow was -$83mm or -11% of the company’s enterprise value last year. 4. Off-balance sheet debt of $265mm: 79% of net assets and 25% of market value. 5. Outstanding stock option liability of $44mm or 5% of current market value.
by David Trainer, Founder & CEO
New Constructs
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Stock Pick of the Week: Sell/Short Discover Financial Services (DFS) – Very Dangerous Rating

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.
by David Trainer, Founder & CEO
New Constructs
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Stock Pick of the Week: Buy Analog Devices Inc (ADI) – Very Attractive Rating

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
by David Trainer, Founder & CEO
New Constructs
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Stock Pick of the Week: JDA Software Group Inc (JDAS) – Very Dangerous Rating

Red Flags: 1. Mis­lead­ing earn­ings: JDAS reported a $14.6mm increase in GAAP earn­ings while our model shows eco­nomic earn­ings declined by $12.9mm (a dif­fer­ence of $27.5mm or 155% of reported net income). 2. Very dan­ger­ous val­u­a­tion: stock price of $27 implies JDAS must grow its NOPAT at over 20% com­pounded annu­ally for 10 years. A 10-year growth appre­ci­a­tion period with a 20%+ com­pound­ing growth rate sets expectations for future cash flow performance quite high. 3. Free Cash Flow was -$203mm or -15% of the company’s enterprise value last year. 4. Asset write-offs of $21mm or 3% of net assets – this means that management has written off at least $0.03 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 $40mm or 6% of net assets. 6. Outstanding stock option liability of $13mm or 1% of current market value.
by David Trainer, Founder & CEO