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David Trainer
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David is CEO of New Constructs (www.newconstructs.com), an independent research that specializes in unearthing key insights from the Financial Footnotes of Annual Reports. Having analyzed over 50,000 annual reports and their Financial Footnotes, New Constructs research regularly produces Hidden... More
My company:
New Constructs
My blog:
Hidden Gems and Red Flags
My book:
The Valuation Handbook
  • Small Cap Stocks Are Dangerous 0 comments
    Nov 15, 2010 4:03 PM | about stocks: SPY, IVV, MSFT, AAPL, QQQ, IWM, VOO

    The Risk/Reward of the entire Rus­sell 2000 gets our Dan­ger­ous Rat­ing. Our recently pub­lished Index Bench­mark report on the Rus­sell 2000 offers unique insights into the under­ly­ing prof­itabil­ity and val­u­a­tion of all the com­pa­nies com­prised by this index. It also offers bench­marks for (1) investors con­sid­er­ing buy­ing ETFs or Index Funds based on the Rus­sell 2000 and for (2) com­par­ing indi­vid­ual stocks to the Rus­sell 2000.

    Our analy­sis of the index is based on the market-weighted aggre­ga­tion of data from our com­pany mod­els for the 1588 com­pa­nies we cover in the Rus­sell 2000. Appen­dix 1 in our report lists all com­pa­nies included. We offer aggre­ga­tion reports on the Risk/Reward Rat­ings for any ETF, mutual fund or cus­tom port­fo­lio. Note that our com­pany mod­els incor­po­rate key data from Finan­cial Foot­notes and the MD&A to reverse account­ing dis­tor­tion and pro­vide investors with the true eco­nomic earn­ings of busi­nesses. Because we can­not repli­cate the hold­ings of pro­pri­etary invest­ment vehi­cles, we pro­vide bench­marks for their Risk/Reward based on the prof­itabil­ity and val­u­a­tion of a rea­son­able proxy for the group of com­pa­nies they hold.

    Below is an overview of the five fac­tors that drive our Over­all Risk/Reward Rat­ing of Dan­ger­ous for this index.

    1. Qual­ity of Earnings
      • Eco­nomic ver­sus reported earn­ings – Very Dangerous/Misleading Earnings
      • Quin­tile Rank­ing for return on invested cap­i­tal (ROIC) – Dangerous/4th Quintile
    2. Val­u­a­tion
      • Free Cash Flow Yield – Neu­tral at 1.5%
      • Price-to-economic book value – Attrac­tive at 1.3
      • Growth Appre­ci­a­tion Period – Very Dan­ger­ous at 56 years

    Def­i­n­i­tions of the five fac­tors that drive our Risk Reward Rat­ings are below:

    1. Qual­ity of Earnings
    2. Val­u­a­tion
      • Free Cash Flow Yield –  mea­sures the market-weighted aver­age of the free cash flow divided by enter­prise value for the com­pa­nies we cover in each index
      • Price-to-economic book value –  mea­sures the market-weighted aver­age of stock price divided by the eco­nomic book value of the com­pa­nies we cover in each index
      • Growth Appre­ci­a­tion Period – mea­sures the market-weighted aver­age of the market-implied growth appre­ci­a­tion period for the com­pa­nies we cover in each index

    Note that the indi­vid­ual com­pany mod­els used to per­form this analy­sis incor­po­rate key data from Finan­cial Foot­notes and the MD&A to reverse account­ing dis­tor­tion and pro­vide investors with the true eco­nomic earn­ings of businesses.



    Disclosure: No positions
    Stocks: SPY, IVV, MSFT, AAPL, QQQ, IWM, VOO
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