Indexing is in vogue these days, but stock-picking still matters. Identifying stocks that are primed to take off is key to outperforming the market.
Unfortunately, identifying stocks that are about to take off is difficult. With corporate filings that run in the hundreds of pages, there’s a lot that investors don’t know. And in the market, what you don’t know can hurt you.
New Constructs helps you know what you don’t know. We perform unrivalled diligence on over 3,000 companies, and we make it accessible and cost-effective.
What do I mean by diligence?
I mean reading and analyzing entire 10-Ks* for over 3000 companies over their entire digital reporting history. 10-Ks contain the most important financial information that companies provide all year. Unlike press releases and 10-Qs, only the 10-Ks contain a complete set of the financial footnotes. And only in these footnotes can one find the full set of data required to assess the true profitability and valuation of stocks.
All too often we find significant data hidden in the footnotes that changes the valuation model for a company. Our more complete models help investors identify the stocks that are significantly undervalued. It also helps us identify dangerous stocks that can tank a portfolio. See how our diligence also paid in 2012 and 2011.
For instance: On June 11 we encouraged investors to buy Western Digital (WDC). WDC had a top-quintile return on invested capital (ROIC) of 40% and the potential for further growth with the move to cloud computing. Despite its strong profitability, WDC traded at a steep discount to current cash flows. The stock is up 37% since our recommendation while the S&P 500 is up only 12%. Those who bought when we first recommended the stock in December 2012 have earned a 164% return.
Here are a few other examples of picks that generated alpha for investors:
1. St. Jude Medical (STJ): We recommended STJ in our second quarter overview of the Health Care sector as data from the footnotes revealed that its true after-tax profit (NOPAT) was actually increasing even though reported earnings were in decline. The stock is up 56% since our April 23 article while the S&P 500 has only gained 18%.
2. Harris Corporation (HRS): We recommended HRS in our first quarter overview of the Telecom sector as it had a steady track record of growth and was trading at a 40% discount to economic book value. The stock is up 50% since our February 1 article while the S&P 500 is only up 23%.
3. Joseph A. Bank Clothiers (JOSB): We recommended JOSB in our first quarter overview of the Small Cap Blend style. JOSB has grown NOPAT in every year since 2000 but the market was predicting a 30% decline. The stock is up 41% since our February 14 article while the S&P is only up 21%.
4. Dun & Bradstreet (DNB): DNB had over $70 million in unusual non-operating expenses that made its reported earnings 25% lower than its NOPAT. The stock is up 19% since our October 10 article while the S&P 500 has only gained 4%.
These are just a few examples of how we made clients money in 2013. Our proprietary technology and patented systems allow us to find undervalued companies that have the potential to generate alpha for investors.