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.
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.
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.
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)
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.Read More
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.Read More
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.Read More
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.Read More
A large write-down of its deferred tax assets could be devastating for Citi–over 30% of its total book value is comprised of net deferred tax assets. Our detailed analysis of the Notes to the Financial Statements also found these RED FLAGS :
1. Over $7bn in off-balance sheet debt
2. $2.2bn in under-funded Pension liabilities
3. Over $10bn in Asset write-offs
HIDDEN GEM: Our detailed discounted cash flow analysis shows that MDT’s current valuation (stock price of $31.95) implies that the company’s profits will decline by 50% and never grow again. Our economic earnings model shows profits are growing, not declining, which makes the Risk/Reward for MDT Very Attractive.Read More
RED FLAG: Our analysis of the Financial Footnotes reveals: the company has written off over $60bn in assets over the last twelve years. That is a big number compared to the company’s market cap of roughly $2.2bn and its net assets of about $1.3bn. This results in economic earnings of -$5,346mm compared to Net Income of -$866mm during the last fiscal year. For details on what causes the difference between Economic Versus Accounting Profits, see Appendix 3 on page 10 of our free report on JDSU.Read More
HIDDEN GEM: Our detailed valuation model shows that MCD grew its “economic” profits more than it accounting profits during its last fiscal year. Economic profits rose by $272mm while accounting profits rose by $238mm. For details on what causes the difference between Economic Versus Accounting Profits, see Appendix 3 on page 10 of our free report on MCD.Read More
RED FLAG: The main driver of the difference between Economic and Accounting earnings is FDX’s $11.9bn of off-balance sheet debt, a big number compared to $19.7bn in Net Assets and $25.6bn of market value.Read More
Here is our free report on Sandridge Energy for Ask Matt readers. Our analysis of the Financial Footnotes reveals a major RED FLAG: the company has written off over $3.4bn in assets in just the last two years.Read More
HIDDEN GEM: Our detailed valuation model shows that IBM grew its “economic” profits more than it accounting profits during its last fiscal year. Economic profits rose by $1.15bn while accounting profits rose by $1.09bn.Read More
In case you needed proof beyond the Global Research Settlement that Wall Street research cannot be trusted, Morgan Stanley delivers by admitting “inadequately disclosing conflicts of interest on the part of its research analysts.”Read More
Accounting data was not designed for equity investors, but for debt investors. “Earnings, earnings per share and earnings growth are misleading measures of corporate performance.”(from page 66 in The Quest For Value by Bennett Stewart, Harper Collins 1991.)Read More
Overall, the Risk/Reward of investing in Yahoo’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.Read More
New Constructs stock-picking consistently ranks among the best of the nationally-recognized research firms.Read More
HIDDEN GEM: Our detailed valuation model shows that XLNX grew its “economic” profits by nearly $14mm during its last fiscal year while it reported an $18mm decline in accounting profits.Read More
There are many ways to define the quality and merit of equity research. One measure stands tallest: performance of stock recommendations. And by that measure, New Constructs’ research is of very high quality (especially for the price!!).Read More
The United States Patent and Trademark Office awarded us patent #7,752,090, titled: System and Method For Reversing Accounting Distortions and Calculating A True Value of a Business.Read More