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Distinctions Between “Growth” and “Value” Investment Styles Are Irrelevant

Thursday, September 19th, 2013 Distinctions Between “Growth” and “Value” Investment Styles Are Irrelevant

Growth without profit (i.e. value) offers no investment merit. Conversely, value without growth offers little upside incentive for investing in any business.

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Price-to-Earnings and Other Multiples Are Not Determinants Of Price

Thursday, September 19th, 2013 Price-to-Earnings and Other Multiples Are Not Determinants Of Price

P/Es and other multiples are the results of of value creation/destruction not a determinant.

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Danger Zone 9/16/13: E*Trade Babies

Monday, September 16th, 2013 DZ_Fig1

Online trading firms aim to exploit the gullibility of many retail investors by encouraging the myth that they can outperform professional money managers armed with vastly greater resources, experience and expertise. The E*Trade babies are the most glaring symbol of this myth. The symbol also reinforces the notion that investing is an easy task that takes no special effort or aptitude to succeed.

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September’s Most DANGEROUS Stocks Available to the Public Today

Wednesday, September 11th, 2013 September’s Most DANGEROUS Stocks Available to the Public Today

New Constructs released September’s Most Dangerous Stocks report to the public today.

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September’s Most Attractive Stocks Available to the Public Today

Wednesday, September 11th, 2013 September’s Most Attractive Stocks Available to the Public Today

New Constructs released September’s Most Attractive Stocks report to the public today.

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New Stocks For Most Attractive/Dangerous Lists

Wednesday, September 11th, 2013 DTV_Fig1

September sees 16 new stocks make our Most Attractive list and 14 new stocks fall into the Most Dangerous category. Our Most Attractive stocks have high and rising return on invested capital (ROIC) and low price to economic book value ratios. Most Dangerous stocks have misleading earnings and long growth appreciation periods implied in their market valuations.

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Discussing FASB’s Lease Proposal

Tuesday, September 10th, 2013 Discussing FASB’s Lease Proposal

On August 27th, I met with my fellow members of the FASB’s Investor Advisory Committee (IAC) to discuss the proposed treatment of operating leases on the balance sheet by the Financial Accounting Standards Board (FASB).

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Danger Zone 9/9/13: Angie’s List (ANGI)

Monday, September 9th, 2013 Dislike

The customer review website is playing investors, and even its own customers, for fools. I am not sure that consumers will use ANGI’s ratings at all in the not-too-distant future.

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September’s Most DANGEROUS Stocks Available to Subscribers Today

Thursday, September 5th, 2013 September’s Most DANGEROUS Stocks Available to Subscribers Today

Paying customers can access September’s 40 Most Dangerous Stocks as of midnight last night. We provide 20 large/mid cap names to sell or short and 20 small cap names in this monthly newsletter.

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September’s Most Attractive Stocks Available to Subscribers Today

Thursday, September 5th, 2013 September’s Most Attractive Stocks Available to Subscribers Today

Paying customers can access September’s 40 Most Attractive Stocks as of midnight last night. We provide 20 large/mid cap names and 20 small cap names to buy in this monthly newsletter.

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Midyear Acquisitions – Invested Capital Adjustment

Thursday, September 5th, 2013 Acquisition_Fig1

When a company makes an acquisition, the entire purchase price is added to the company’s balance sheet in the year of the acquisition along with any assumed debts or other long-term liabilities. However, the only income added to the income statement is that which occurs after the acquisition closes. In other words, the balance sheet is charged with the full price of the acquisition while the income statement only gets partially impacted.

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Reported Net Non-Operating Items – NOPAT Adjustment

Tuesday, September 3rd, 2013 Non-Op_Fig1

Income statement adjustments include financing items like interest expense/income, preferred dividends and minority interest income. These items are related to the financing of a company’s operations, not the operations themselves. We always calculate NOPAT on an unlevered basis.

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Danger Zone 8/30/13: LinkedIn (LNKD)

Friday, August 30th, 2013 Danger Zone 8/30/13: LinkedIn (LNKD)

LNKD continues our theme of hot stocks that have overshot their fair valuations. So far this year, LNKD is up 110% while the S&P 500 (SPY) is only up 15%. LNKD is a high-momentum stock in a popular sector, so investors are turning a blind eye to its competitive weaknesses and high valuation. Most people are aware that LNKD is expensive compared to its current earnings, but few people seem to aware of its off-balance sheet liabilities and the alarming level of profit growth implied by its stock price.

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Danger Zone 8/26/13: First Trust Value Line 100 ETF (FVL)

Monday, August 26th, 2013 Danger Zone 8/26/13: First Trust Value Line 100 ETF (FVL)

First Trust Value Line 100 ETF (FVL) is in the Danger Zone this week. FVL is another example of a supposedly “passive” ETF that purportedly tracks an index but actually resembles an actively managed portfolio. FVL’s methodology tracks an index, but it is an index in name only.

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Excess Cash – Valuation Adjustment

Friday, August 23rd, 2013 ExcessCash_Figure1

For most companies, we estimate the required amount of cash for normal business operations to be around 5% of sales. However, many companies hold cash or other liquid investments above and beyond this amount. We refer to this extra amount as excess cash. This surplus cash can be used for any number of purposes, including acquisitions, research and development, and cushioning the company against economic downturns. Excess cash is immediately available for distribution to shareholders, so we add a company’s excess cash to our calculation of shareholder value.

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Discontinued Operations – Valuation Adjustment

Friday, August 23rd, 2013 Discontinued_Figure1

There is one last adjustment we must make involving discontinued operations: adding net assets from discontinued operations to shareholder value. Because discontinued operations are parts of a company being held for sale, the value of the net assets from these discontinued operations approximate the cash the company will receive from the sale. This cash will then be available for distribution to shareholders.

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Enterprise Value – Definition and calculation

Thursday, August 22nd, 2013 Enterprise Value – Definition and calculation

The theoretical value of Enterprise Value is the total takeover value of the firm. And if that is the case, then all claims on cash flows need to be included. We go the extra mile with our diligence to ensure all claims are captured in our Enterprise Value formula.

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Deferred Compensation Assets and Liabilities – Valuation Adjustment

Wednesday, August 21st, 2013 NewConstructs_deferredcomp

The net amount of deferred compensation is included in shareholder value. If a company has a net liability, future cash flows will be diverted to pay for that obligation. If a company has a net asset, then any future increases in the obligation will not need to be met with new contributions from the company. Instead, the company can return that cash to shareholders.

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Danger Zone 8/19/13: Rite Aid (RAD)

Monday, August 19th, 2013 RAD_Figure1

RAD is up against the ropes right now. The company has to contend with larger, more efficient competitors, significant debt, and declining sales. Don’t be fooled by the 150% growth in the share price this year. RAD is much worse off than its stock suggests.

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Net Deferred Tax Assets and Liabilities – Valuation Adjustment

Monday, August 19th, 2013 DTL

We subtract net deferred tax liabilities (DTLs minus DTAs) from our calculation of shareholder value as they are real future cash obligations that limit the amount of money available for distribution to shareholders.

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