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Diligence Institute

Highlights From New Constructs Investment Research

Danger Zone: Value Investors

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Check out this week’s Danger Zone Interview with Chuck Jaffe of Money Life and MarketWatch.com.
Value investors are in the… Read more >>

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Danger Zone: Momentum Investors and the Financial Sector

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As regulators dole out punishments that fit the crimes, they are finally closing many of the illegal trading loopholes that have driven so much of Wall Street profits over the past decade.

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Preferred Stock – Valuation Adjustment

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Preferred stock is a hybrid instrument that carries no voting rights but has a senior claim on assets and cash flows to common stock. Dividends usually must be paid out to preferred stock owners before common stock owners can receive any money. In the event of liquidation, preferred shareholders also have priority.

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Accumulated Goodwill Amortization and Unrecorded Goodwill – NOPAT Adjustment

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Converting GAAP data into economic earnings should be part of every investor’s diligence process. Performing detailed analysis of footnotes and the MD&A is part of fulfilling fiduciary responsibilities.

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Off-Balance Sheet Debt – Invested Capital Adjustment

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Investors who ignore off-balance sheet debt are not holding companies accountable for all of the capital invested in their business. By adding back off-balance sheet debt to invested capital, one can get a true picture of the value that management is creating for shareholders. Diligence pays.

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Off-Balance Sheet Reserves – Invested Capital Adjustment

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Reported assets don’t tell the whole story of the capital invested in a business. Accounting rules provide numerous loopholes that companies can exploit to hide issues and obscure the true amount of capital invested in a business over its life.

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Non-Operating Tax Adjustment – NOPAT Adjustment

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Without removing the tax impact of non-operating items, one still gets distorted picture of a company’s operating profitability.

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Change in Total Reserves – NOPAT Adjustment

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Reported earnings don’t tell the whole story of a company’s profits. They are based on accounting rules designed for debt investors, not equity investors, and are manipulated by companies to manage earnings. Only economic earnings provide a complete and unadulterated measure of profitability.

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Non-Operating Expenses Hidden in Operating Earnings – NOPAT Adjustment

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Non-operating expenses are unusual charges that don’t appear on the income statement because they are bundled in other line items. Without careful footnotes research, investors would never know that these non-recurring expenses distort GAAP numbers by lowering operating earnings.

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How To Find the Best Sector ETFs

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Finding the best ETFs is an increasingly difficult task as there are more and more to choose from every day.

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Best & Worst ETFs and Mutual Funds: Large-cap Value Style

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The Large-cap Value style ranks second out of the twelve fund styles as detailed in my Style Rankings for ETFs and Mutual Funds report. It gets my Neutral rating, which is based on aggregation of ratings of 41 ETFs and 772 mutual funds in the Large-cap Value style as of May 1, 2013.

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Best & Worst ETFs and Mutual Funds: Large-cap Blend Style

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The large-cap blend style ranks first out of the twelve fund styles as detailed in my Style Rankings for ETFs and Mutual Funds report. It gets my Neutral rating, which is based on aggregation of ratings of 33 ETFs and 944 mutual funds in the large-cap blend style as of February 1st, 2013.

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How To Find the Best Sector ETFs

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Finding the best ETFs is an increasingly difficult task in a world where a new ETF seems to be born every 10 seconds.

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Citigroup (C) and Bank Of America (BAC) Dropped from Most Dangerous List

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For the first time in many months, both Citigroup (C) and Bank Of America (BAC) are not on our Most Dangerous Stocks list as of the release of the August report.

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Best & Worst ETFs and Mutual Funds: Large-cap Blend Style

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The large-cap blend style ranks second out of the twelve fund styles as detailed in my style roadmap. It gets my Neutral rating, which is based on aggregation of ratings of 40 ETFs and 1127 mutual funds in the large-cap blend style as of July 17, 2012.

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Best & Worst ETFs and Mutual Funds: Large-cap Blend

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The large-cap blend style ranks first out of the twelve fund styles as detailed in my style roadmap. It gets my Neutral rating, which is based on aggregation of ratings of 40 ETFs and 1193 mutual funds in the large-cap blend style as of April 24, 2012.

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Best & Worst Style ETFs & Mutual Funds

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The best ETFs and mutual funds have high-quality holdings and low costs. As detailed in “A cheap fund is not always a good fund”, there are few funds that have both good holdings and low costs. While there are lots of cheap funds, there are very few with high-quality holdings.

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Bank Of America (BAC): Very Dangerous Rating — for Ask Matt Readers

Bank Of America (BAC): Very Dangerous Rating — for Ask Matt Readers

Bank Of America (BAC) gets our Very Dangerous rating because it has misleading earnings and a very expensive valuation. Here is my free report on BAC.

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The Most Dangerous ETFs For March

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My ratings on ETFs are unique because they are based on my stock ratings for each of a fund’s holdings.
Ergo, the “Most Dangerous” ETFs allocate the most capital to stocks on March’s Most Dangerous Stocks list, which is available for non-subscribers as of today. There are 40 stocks on the Most Dangerous list every month.

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Matt Taibbi of Rolling Stone References My Article on BAC’s New Fees

Matt Taibbi of Rolling Stone References My Article on BAC’s New Fees

Always flattered when a journalist, especially one as famous and respected at Mr. Taibbi, references my work. His article “Bank of America In Trouble?” incorporated the meat of my “Raising Fees Is A Desperate Measure: Sell BAC” article.

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