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David Trainer
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Follow me on Twitter: @NewConstructs David is CEO of New Constructs (www.newconstructs.com), an independent research firm that leverages proprietary technology to find key insights from the Financial Footnotes of 10Ks and 10Qs. Having analyzed over 70,000 annual reports and their Financial... More
My company:
New Constructs
My blog:
The Diligence Institute
My book:
The Valuation Handbook
  • Are You Missing Something In Your Company Valuations?
    Accounting rules make it easy for companies to manipulate traditional measures of profitability and value. That's why we make over 30 types of accounting adjustments to strip out the effects of these accounting policies.

    Several of these adjustments help us accurately calculate economic book value (EBV) and shareholder value in our discounted cash flow model. EBV is our measure of the no-growth value of a stock based on the current net operating profit after tax (NOPAT) of the business, and it helps us measure the market's expectations relative to the company's current economic profitability. Shareholder value is the value available to shareholders in our DCF model after other, senior claims on cash flows have been met.

    Some adjustments represent senior claims to equity holders that reduce economic book value and shareholder value while others are assets that we expect to be accretive to shareholder value. For example, Tesla (TLSA), instead of paying employees in cash, elects to pay much of its compensation in the form of stock options, which amounted to $553 million at the end of 2012. Of course, after the stock's historic run-up over 2013 and 2014, these options were worth much, much more. By the end of 2014, the value of Tesla's outstanding stock options had reached $4.1 billion, or 15% of the company's total market value. These options represent future share dilution that reduce the cash flows that are paid out to shareholders, which reduces Tesla's value in our model. As Tesla has failed to become a cash machine in the past 12 months, investors have begun to worry about the company's position, and shares have dropped over 33% since their peak in September 2014.

    There are countless other examples of how footnotes diligence could have given investors a clear picture of what companies were worth investing money into in 2014.

    We've compiled a "top 10″ list of the companies (who have already filed for 2014) with the largest adjustments to their valuations.

    See which companies have had the largest adjustments to their valuations this year for only $9.99.

    Tags: AAPL, VZ, BA, MT, PBR, FMCC, WMB, ORCL, T, valuation
    Apr 23 9:59 AM | Link | Comment!
  • How To Find The Best Sector Mutual Funds – 1Q15

    Finding the best mutual funds is an increasingly difficult task in a world with so many to choose from. How can you pick with so many choices available?

    Don't Trust Mutual Fund Labels

    There are at least 148 different Information Technology mutual funds and at least 704 mutual funds across all sectors. Do investors need that many choices? How different can the mutual funds be?

    Those 148 Information Technology mutual funds are very different. With anywhere from 25 to 394 holdings, many of these Information Technology mutual funds have drastically different portfolios, creating drastically different investment implications.

    The same is true for the mutual funds in any other sector, as each offers a very different mix of good and bad stocks. Consumer Staples ranks first. Financials ranks last. Details on the Best & Worst mutual funds in each sector are here.

    A Recipe for Paralysis By Analysis

    We firmly believe mutual funds for a given sector should not all be that different. We think the large number of Information Technology (or any other) sector of mutual funds hurts investors more than it helps because too many options can be paralyzing. It is simply not possible for the majority of investors to properly assess the quality of so many mutual funds. Analyzing mutual funds, done with the proper diligence, is far more difficult than analyzing stocks because it means analyzing all the stocks within each mutual fund. As stated above, that can be as many as 394 stocks, and sometimes even more, for one mutual fund.

    Any investor worth his or her salt recognizes that analyzing the holdings of an mutual fund is critical to finding the best mutual fund. Figure 1 shows our top-rated mutual fund for each sector.

    Figure 1: The Best Mutual Fund in Each Sector

    (click to enlarge)

    "Sources: New Constructs, LLC and company filings

    How to Avoid "The Danger Within

    Why do you need to know the holdings of mutual funds before you buy?

    You need to be sure you do not buy a fund that might blow up. Buying a fund without analyzing its holdings is like buying a stock without analyzing its business and finances. No matter how cheap, if it holds bad stocks, the mutual fund's performance will be bad.

    PERFORMANCE OF FUND'S HOLDINGS = PERFORMANCE OF FUND

    If Only Investors Could Find Funds Rated by Their Holdings…

    New Constructs covers over 3000 stocks and is known for the due diligence we do for each stock we cover. Accordingly, our coverage of mutual funds leverages the diligence we do on each stock by rating mutual funds based on the aggregated ratings of the stocks each mutual fund holds.

    Oak Associates Red Oak Technology Fund (MUTF:ROGSX) is the top-rated Information Technology mutual fund and the overall top fund of the 704 sector mutual funds that we cover.

    The worst mutual fund in Figure 1 is Fidelity Select Chemicals Portfolio (MUTF:FSCHX), which gets a Neutral or 3-star rating. One would think mutual fund providers could do better for this sector.

    To see ratings on all the mutual funds we cover, start your Gold Membership today.

    Disclosure: David Trainer and Kyle Guske II receive no compensation to write about any specific stock, sector, or theme.

    Apr 06 9:18 AM | Link | Comment!
  • How To Find The Best Sector ETFs – 1Q15

    Finding the best ETFs is an increasingly difficult task in a world with so many to choose from. How can you pick with so many choices available?

    Don't Trust ETF Labels

    There are at least 43 different Financial ETFs and at least 187 ETFs across all sectors. Do investors need that many choices? How different can the ETFs be?

    Those 43 Financials ETFs are very different. With anywhere from 20 to 558 holdings, many of these Financials ETFs have drastically different portfolios, creating drastically different investment implications.

    The same is true for the ETFs in any other sector, as each offers a very different mix of good and bad stocks. Consumer Staples ranks first. Financials ranks last. Details on the Best & Worst ETFs in each sector are here

    A Recipe for Paralysis By Analysis

    We firmly believe ETFs for a given sector should not all be that different. We think the large number of Financials (or any other) sector of ETFs hurts investors more than it helps because too many options can be paralyzing. It is simply not possible for the majority of investors to properly assess the quality of so many ETFs. Analyzing ETFs, done with the proper diligence, is far more difficult than analyzing stocks because it means analyzing all the stocks within each ETF. As stated above, that can be as many as 558 stocks, and sometimes even more, for one ETF.

    Any investor worth his or her salt recognizes that analyzing the holdings of an ETF is critical to finding the best ETF. Figure 1 shows our top-rated ETF for each sector.

    Figure 1: The Best ETF in Each Sector

    (click to enlarge)

    Sources: New Constructs, LLC and company filings

    How to Avoid "The Danger Within"

    Why do you need to know the holdings of ETFs before you buy?

    You need to be sure you do not buy a fund that might blow up. Buying a fund without analyzing its holdings is like buying a stock without analyzing its business and finances. No matter how cheap, if it holds bad stocks, the ETF's performance will be bad.

    PERFORMANCE OF FUND'S HOLDINGS = PERFORMANCE OF FUND

    If Only Investors Could Find Funds Rated by Their Holdings

    New Constructs covers over 3000 stocks and is known for the due diligence we do for each stock we cover. Accordingly, our coverage of ETFs leverages the diligence we do on each stock by rating ETFs based on the aggregated ratings of the stocks each ETF holds.

    State Street SPDR Consumer Staples Select Sector Fund (NYSEARCA:XLP) is the top-rated Consumer Staples ETF and the overall best ETF of the 187 sector ETFs that we cover.

    The worst ETF in Figure 1 is Fidelity MSCI Telecom Services ETF, which gets a Dangerous or 2-star rating. One would think ETF providers could do better for this sector.

    Disclosure: David Trainer and Kyle Guske II receive no compensation to write about any specific stock, sector, or theme.

    Tags: sector ETF
    Apr 06 9:15 AM | Link | Comment!
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