Long/Short Equity, Value, Deep Value
Contributor Since 2010
1. Harvard Business School & MIT Sloan prove our fundamental data is superior.
2. Ernst & Young proves the superiority of our financial analytics over Capital IQ & Bloomberg.
3. Indiana Kelly School of Business proves our stock ratings outperform human analysts.
If these prestigious institutions trust us so much that they decided to publish official papers to prove the superiority of our research, then you can safely trust us, too.
David is CEO of New Constructs (www.newconstructs.com). David is a distinguished investment strategist and corporate finance expert. He was a 5-yr member of FASB's Investors Advisory Committee. He is author of the Chapter “Modern Tools for Valuation” in The Valuation Handbook (Wiley Finance 2010).
Best-in-class data and analytics are the cornerstone of our value proposition to clients.
In a new white paper, “Getting ROIC right: how an accurate view of ROIC can drive improved shareholder value”, we aim to demonstrate the superiority of our data, analytics and the importance of getting ROIC right.
Through detailed examples, this paper shows how our Robo-Analyst technology, accounting adjustments, and calculation of ROIC create a material difference in our fundamental research versus the industry. Appendices in the white paper show how other major firms’ ROICs are way off target and lack the diligence we provide - for a mega cap company.
Our diligent approach to calculating ROIC has practical, real-world implications for the investment decision making process. We’ve previously analyzed how optimizing ROIC could impact valuations, including case studies on Oracle (ORCL), American Express (AXP), and Morgan Stanley (MS). We argued that each of these firms were undervalued and that by aligning corporate strategy and incentive compensation with ROIC, each firm could substantially boost its market cap. Since then, each of these stocks have outperformed the S&P 500 and their valuations more closely align with what one would expect based on the firms’ ROICs.
More recently, we highlighted how our forensic accounting and ROIC calculation empowers investors to identify alpha-generating investment ideas. In the article “Alpha-generating Forensic Accounting Examples”, we identified five long ideas and three Danger Zone picks where our research deviated from traditional approaches. For example, NVIDIA Corporation (NVDA) was featured as a Long Idea in September 2015. Our research revealed that NVDA’s true ROIC, as well as its rate of change, was significantly understated by GAAP-based ROIC. During the subsequent 237-day holding period, NVDA rose 86% compared to just 6% for the S&P 500.
We’ve long argued that return on invested capital is not only the most intuitive measure of corporate performance, but it is also the best. However, the benefits of a focus on ROIC are only realized if that ROIC is accurate. Getting ROIC right, which requires adjustments for numerous accounting loopholes, is key to effectively measuring corporate performance. The paper provides empirical evidence that our diligent approach helps provide the best fundamental research.
At the same time, we want investors to know just how much work goes into getting ROIC right. The required diligence shouldn’t be hidden inside a “black-box.” As Ernst & Young notes, “The other advantage of New Constructs is the transparency in disclosing calculations and all the data behind them. It is hard to determine the calculations at a granular level from the reports of many data providers.”
To that end, we’re 100% transparent about the adjustments and calculations we make in regards to after-tax profit (NOPAT), invested capital, ROIC, and other metrics such as free cash flow and economic earnings.
For more information, see below for insights into the importance of getting ROIC right.
This article originally published on September 22, 2017.
Disclosure: David Trainer, Sam McBride and Kyle Guske II receive no compensation to write about any specific stock, sector, style, or theme.