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Diligence Institute

Highlights From New Constructs Investment Research

Netflix (NFLX): Even More Dangerous

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In November of last year, Netflix (NFLX: ~$355/share) landed in the Danger Zone after rising 363% year-to-date on promising quarterly… Read more >>

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Apple’s Declining Advantage is Undeniable

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Apple cannot have pricing power and market share at the same time. No one can for an extended period of time. The problem with AAPL is that it is priced for the company to achieve market share penetration and growth at high prices. The reality is that the quality of Apple products versus competitors is declining. Prices will have to come down just to maintain market share.

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CNBC Interview: Confirming AAPL Thesis – Apple Is Still Rotten

CNBC Interview: Confirming AAPL Thesis – Apple Is Still Rotten

Here’s my latest CNBC interview on my Apple (AAPL) thesis, originally articulated in Danger Zone 5/13/2013: Apple Inc. (AAPL).

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Apple Stays Rotten

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The “value” in Apple is an illusion. Astute investors need to look at Apple through the lens of what is a reasonable ROIC in the future.

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

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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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Excess Cash – Valuation Adjustment

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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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Excess Cash – Invested Capital Adjustment

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Most companies hold some cash—or cash equivalents in the form of investments—above this required amount. Companies hold excess cash in order to cushion against economic downturns, prepare for acquisitions, or any number of other reasons. Sometimes, past profits pile up on balance sheets and are a form of excess cash. Excess cash is not needed for the operations of a company. It is removed from our calculation of invested capital.

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Danger Zone 6/17/13: Citigroup (C)

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As the market bulls continue to look to rising interest rates as a sign of future strength for Citi, they ignore the fundamentals of the market and of Citi’s weak profit history.

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Danger Zone 6/10/13: “Passive” Investors

Danger Zone 6/10/13: “Passive” Investors

Passive investors are in the Danger Zone for not recognizing that they are actually active investors.

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Danger Zone 6/3/2013: Perma-Bears and Bubble Alarmists

Danger Zone 6/3/2013: Perma-Bears and Bubble Alarmists

I am optimistic about the U.S. economy and I don’t believe we are in bubble. Too many investors and economists are looking at the economy the wrong way.

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“Index” Label Myths

“Index” Label Myths

The word “index” in an ETF label does not always mean that investors are getting the specific exposure they seek. Diligence on ETF holdings is necessary despite what the providers might have you believe. Below I dispel the following myths concerning index ETFs.

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The Truth Behind AAPL’s Numbers

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This article provides some empirical evidence behind my putting Apple (AAPL) in the Danger Zone last week because its return on invested capital (ROIC) is outrageously high. That fact underscores why valuing this company or any other with the expectation that such a high ROIC was sustainable would be a mistake.

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Danger Zone 5/20/2013: Amazon.com (AMZN)

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The belief that Internet retail is or will be more profitable than traditional retail is untrue. Amazon is in a competitive, low margin business that cannot justify the profit growth implied in its valuation.

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Buy Accenture (ACN): Profiting Off Others’ Innovations

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No matter what time range I review, Accenture’s history attests to the quality of its management and business model.

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CNBC Live Interview: Why AAPL Is Worth $240

CNBC Live Interview: Why AAPL Is Worth $240

My interview on CNBC this morning discussing my analysis of Apple Inc. (AAPL) can be seen here.

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Danger Zone 5/13/2013: Apple Inc. (AAPL)

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Too many investors are looking at AAPL through the rear view mirror and assume that its sky-high profits and return on invested capital (ROIC) are sustainable. As I detail in my CNBC interview, Apple is not cheap and investors should not underestimate the impact of losing Steve Jobs.

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How To Avoid the Worst Style ETFs

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Picking from the multitude of style ETFs is a daunting task. We are here to make it simpler and smarter.

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Best & Worst ETFs & Mutual Funds: Energy Sector

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The Energy sector ranks fifth out of the ten sectors as detailed in my Sector Rankings for ETFs and Mutual Funds report. It gets my Neutral rating, which is based on aggregation of ratings of 20 ETFs and 73 mutual funds in the Energy sector as of January 25th, 2013.

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The Danger Zone Pick: 11/12/12

The Danger Zone Pick: 11/12/12

JPMorgan Trust II: JPMorgan Large Cap Growth Fund (OLGAX) is in the Danger Zone this week.

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How To Avoid The Worst ETFs

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The focus of this article is investing risk or the relative investment potential of the ETF. This risk is much more difficult to asses because it requires researching the investment potential of the ETFs holdings.

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