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Diligence Institute

Highlights From New Constructs Investment Research

July’s Most DANGEROUS Stocks Available to the Public

July’s Most DANGEROUS Stocks Available to the Public

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

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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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Footnotes Adjustments for Earnings & Valuation Diligence

Footnotes Adjustments for Earnings & Valuation Diligence

This article details the uniquely rigorous diligence behind each of our ratings on 3000 stocks, 7000 mutual funds and 400 ETFs. It contains reports on all the adjustments we make to convert GAAP data to economic earnings and derive true shareholder value in a discounted cash flow model.

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Implied Interest For Operating Leases – 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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Non-Operating Income Hidden in Operating Earnings – NOPAT Adjustment

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Non-operating items in operating income are unusual gains 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 income items distort GAAP numbers by artificially raising operating earnings.

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February’s Most DANGEROUS Stocks Available to the Public

February’s Most DANGEROUS Stocks Available to the Public

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

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Top Stock Picks & Shorts: Moneylife Radio Interview w/ Chuck Jaffe

Top Stock Picks & Shorts: Moneylife Radio Interview w/ Chuck Jaffe

Listen in on my 15 minute interview describing the rigorous diligence New Constructs applies to every rating on the stocks, ETFs and mutual funds we cover.

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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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Registered Rep Interview on Economic vs Accounting Earnings

Registered Rep Interview on Economic vs Accounting Earnings

David A. Geracioti, Editor-In-Chief of Registered Rep magazine, recently invited me for an interview on why economic earnings matter when selecting stocks, mutual funds and ETFs.

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Buy LRCX: More Value Than Meets the Eye

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Most of my research and publishing tends to focus on companies manipulating accounting rules to make their reported earnings look better than the real economic cash flows of their business.
It is unfortunately rare that I find a company whose economic earnings are outpacing the reported accounting results and whose stock is cheap.
One such company is Lam Research (LRCX – very attractive rating). One of September’s most attractive stocks, LRCX offers investors hidden value.

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Sell Baker Hughes Before The Stock Goes Up In Fumes

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It is only a matter of time before oil and gas stocks stop moving with the price of oil and start reflecting their underlying economics.
When this happens, Baker Hughes (BHI – “very dangerous” rating) will be among the stocks that fall the hardest.

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Nucor Corporation (NUE) — Dangerous Risk/Reward Rating for Ask Matt Readers

Nucor Corporation (NUE) — Dangerous Risk/Reward Rating for Ask Matt Readers

The valuation of NUE’s stock implies the company will grow its after-tax cash flow (NOPAT) by nearly 20% compounded annually for 20 years.

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PowerShares Leads The “Most Attractive” ETFs

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PowerShares Buyback Achievers (PKW) is the #1 “most attractive” ETF out of the 375+ ETFs we ranked according to our predictive rating system.

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Sell Morgan Stanley Before It Sells You Down the River

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When Morgan Stanley (MS) started in 1935, there were around fifteen employees. For 2010, the company reported 62,542 employees. Bigger is not always better. And for big, publicly-traded companies, big tends to be worse especially when it comes to financial reporting.

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Buy Eli Lilly & Company (LLY) – Attractive and Safe Enough To Take Home To Mom

Buy Eli Lilly & Company (LLY) – Attractive and Safe Enough To Take Home To Mom

The risk/reward of this stock is quite compelling. Downside risk is low as the valuation already implies a permanent 54% decline in profits. How much worse can the valuation get? Upside reward potential is strong as the stock has to go over $77/share to trade at a value that implies the company’s profits will experience a 0% decline, still a no-growth scenario.

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Stock Pick of the Week: Buy Apollo Group Inc cl A (APOL)- Very Attractive Rating

Stock Pick of the Week: Buy Apollo Group Inc cl A (APOL)- Very Attractive Rating

HIDDEN GEMS:
1. Our discounted cash flow analysis shows that APOL’s current valuation (stock price of $42.31) implies that the company’s profits will decline by 60% and never grow again.
2. Economic earnings are higher than reported accounting earnings.
3. Excess cash of $1,201mm or about 20% of its market cap

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Tech and Pharma Stocks are Most Attractive for January

Tech and Pharma Stocks are Most Attractive for January

January’s Most Attractive Stocks are now avail­able.
Technology and Pharmaceutical stocks predominate compared to other sectors. One newcomer to the… Read more >>

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Starbucks -Don’t Be Fooled Again: Stong Brand Does Not Equal Strong Stock

Starbucks -Don’t Be Fooled Again: Stong Brand Does Not Equal Strong Stock

We went on record that investors should short SBUX on 11/6/2006 when the stock was close to $38 per share. Click here to see the Fortune Article. The stock did not look attractive to us until 2 years (11/18 – 11/20/08) later when it was under $8, and that for only about 3 days. And ever since we have had a Neutral or Dangerous Rating on the stock.

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Stock Pick of the Week: Buy Accenture Plc (ACN)- Very Attractive Rating

Stock Pick of the Week: Buy Accenture Plc (ACN)- Very Attractive Rating

HIDDEN GEMS:
1. Our dis­counted cash flow analy­sis shows that ACN’s cur­rent val­u­a­tion (stock price of $48.59) implies that the company’s prof­its will decline by 9% and never grow again.
2. Eco­nomic earn­ings are higher than reported accounting earnings.
3. Excess cash of $3,728mm or about 12% of its market cap

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Stock Pick of the Week: Sell/Short Discover Financial Services (DFS) – Very Dangerous Rating

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.

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