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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
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My blog:
Hidden Gems and Red Flags
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The Valuation Handbook
  • Retail and Financials Are “Most Dangerous” In January 0 comments
    Jan 10, 2011 4:55 PM | about stocks: WFM, FL, ONXX, EWBC

    Retail and Financials are the most common stocks on our Most Dangerous Stocks list for January. Now that the holiday shopping season is behind us, we see little incremental upside in the retail and financial sectors. Whole Foods Market (WFMI) remains a steady member of our not-so-popular stocks-to-short club. We love the store, but the stock is for the birds. The current stock price implies the company’s profits will grow more than 3200% while our model of the economic, not accounting, cash flows shows its profits are actually declining. Our models tell a similar story for Foot Locker (NYSE:FL), Onyx Pharmaceuticals (NASDAQ:ONXX), and East West Bancorp (NASDAQ:EWBC).

    All of these stocks get our “very dangerous” rating because they have misleading earnings, which means their reports earnings are positive and rising while their economic earnings are negative and declining. In addition, the valuations for these stocks are very high. We recommend investors sell or short the stocks in our Most Dangerous Stocks newsletter.

    The high expectations in the prices of these stocks expose investors to lots of downside risk and little upside potential.

    Here is a quick overview for the January reports.

    • 10 new stocks make our January lists.
    • The Dangerous Stocks (+5.5%) rose more than the S&P 500 fell (+4.1%) and underperformed as a short portfolio last month.
    • Most Dangerous Stocks have misleading earnings, which means reported earnings are rising while true economic earnings are declining.

    Barron’s recently rec­og­nized our Most Attrac­tive Stocks port­fo­lio as #1
    over the prior 12 months among the best of the Wall Street research firms.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Stocks: WFM, FL, ONXX, EWBC
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