New Constructs

The Trump Trade No One Is Talking About" - sharing this e-letter early b/c it's so timely. The last few days have been rough for the market, especially the many super expensive tech stocks. Of course, our Zombie Stocks got crushed and that portfolio did great. Not surprisingly, a few more Wall Street strategists jumped on the bearish bandwagon. But, do we know if this is it…is it the correction that everyone with a fundamental hair on their head knows is coming, knows we need? I’m going to reveal a few special ideas in this letter: - Trends from our proprietary macro research, usually reserved for our Institutional clients, - The real impact of a Trump presidency on the markets, - The best stocks to buy and sell in this market. About 15 years ago, a very smart client told me that corrections are not caused by valuation or anything related to fundamentals. He said you need a liquidity crunch to catalyze a sustained correction and a bear market. Do you think regulators and politicians have picked up on this idea? Haha! We’ve seen unprecedented liquidity pouring into our markets and economy ever since COVID. Unprecedented. Take a look at Figure 1 and see the huge jump in assets on the Federal Reserve Bank’s balance sheet when COVID hit. Compare that jump to the one during the housing crisis. It looks 3-4x larger. It appears that regulators and politicians really leaned into the idea of flooding the economy with money during COVID after seeing how well it worked in 2009. Also, note that the excess liquidity pumped into the system in 2009 was never taken out. Quite the opposite, it only went higher before the next big jump during COVID. I think regulators and politicians are liquidity junkies now. They’re hooked like a drug addict on the short-term fix-all for any economic problems: give the economy more money. Figure 1: Total Assets on the Federal Reserve’s Balance Sheet Remain Elevated <see full report> Looking at a shorter time frame, we see that the Assets have been coming down this year though not by a lot. We are nowhere near getting back to pre-COVID levels, and I am not confident that we ever will. Looking at a shorter time frame, we see that the Assets have been coming down this year though not by a lot. We are nowhere near getting back to pre-COVID levels, and I am not confident that we ever will. Figure 2: Total Assets on the Federal Reserve’s Balance Sheet Are Coming Down <see full report> So, why is the market still going up if the Federal Reserve Bank is reducing its balance sheet? Answer: because the Federal government is putting fiscal stimulus into the economy faster than the Fed is reducing its balance sheet. Figure 3: Federal Debt Has Skyrocketed <see full report> Figure 4 plots the total Federal debt ... the trend for Federal debt is going up at the same rate or faster than what we saw in 2023. https://lnkd.in/gCjcfsx3

David Trainer's most popular e-letter "Fake News Is Cheap for a Reason" is below. We see so much fake news ... it’s hard to know what is real. Same is true of stock research. Wall Street might be the OG of fake news. You deserve better. I'll show you how to get it. In this letter, I am going to show you clear examples of how misleading Wall Street and other research can be. I’m also going to show you how opaque their research is. Then, I am going to show you how our research is better and throw in a few free stock ratings. Now, you may be asking yourself, why do I keep giving away so much valuable information in these letters? The answers: 1. We genuinely believe in improving the integrity of the capital markets. 2. We hope to get your business one day. The same cannot be said about our competitors. Here’s the proof that they give away bad research on the cheap. Remember, when the product is free, you’re the product. Have you ever read the Disclaimers at the end of a Wall Street research report? You’ll be surprised at what you might find. I have an example for you. From page 8 of a recent report from RBC Securities on Chord Energy Corp (CHRD). The investment bank admits their research: 1. does not have to be accurate and 2. can be conflicted because the author’s compensation comes from a bank that makes money from investment banking. Figure 1: Disclaimers from a Wall Street Research Report Get the rest of the e-letter here: https://lnkd.in/ghUaruZA

We often say that no one can match the depth & rigor of our research. Here's a short video showing why that is true with one of the Stock reports we update daily for over 3,000 stocks: https://lnkd.in/gKn677TF. Hint: the report is on Amazon ($AMZN).

Last week's e-letter from David Trainer is available for free now here https://lnkd.in/gX4mvsY3 Here's a snippet: "If there’s one thing we learned from yesterday, it is that your money is not safe. You wake up one day and poof, the market sells off huge, triggered by some weird stuff in Japan. At the same time, CNBC’s Jim Cramer continues to tirelessly push a bullish thesis on anything that moves. And, Wall Street pundits unabashedly reinforce the message that everything is fine: “We’re your trusted source for navigating the markets.” How many of you got an email from Seeking Alpha with the subject: “Markets are down – we’ve got you covered”? Right, sure. Those messages are little consolation for the unexpected losses in your portfolio. It’s like these firms forgot they were bullish a few days ago, and you shouldn’t be surprised by their bearish take today. There is no honor among thieves. If you think I’m coming on too strong, bear with me for just a minute. I am going to share with you the best, quickest tutorial on Wall Street. Then, I am going to explain what sparked the big sell off the last few days First, I need to be sure you have the right context for what’s happening these days. I promise to keep it short and sweet with a movie clip that is worth a million words. I will also, as usual, provide several specific stock ideas. But, I will not pretend that I have all the answers. Wall Street firms and advisors like to make you think everything is taken care of. They’ve done the work. Their ratings are reliable. They’ve done their diligence and scrubbed the numbers. And, they keep telling us that we can trust them even though time and again, we learn that we can’t. This scene from the movie The Big Short is one of my favorites of all time because it so perfectly shows why you cannot trust Wall Street. If you’ve not watched this 87-second clip before, you are in for a treat. And, you better be sitting down. ----more in the full letter: https://lnkd.in/gX4mvsY3

News alert: valuation matters today! Our DCF models are an incredibly powerful valuation tool as many of you who’ve seen our Reverse DCF Case studies know (see them here: https://lnkd.in/giE2MqAF). And, I have some news about those models. In case you’ve not seen, the team is hard at work making a lot of cool updates to our website and research tools. One of my favorite is the new charting tools for the Decision Page in our reverse DCF models. Words alone can’t do this update justice; so I put together a short video for everyone to see. Hey, I’m not a video producer, and I’m not getting an Academy awards for this video, but I think it gets the job done. In this short video, I am going to show everyone exactly why Tesla's stock ($TSLA) valuation is ridiculous. I welcome anyone to take the other side of that argument after watching this video. https://lnkd.in/gGN54RMS

Our CEO David Trainer is joining CNBC's Power Lunch to talk mega cap stocks with Kelly Evans at ~2pmET. 👀

David Trainer's June 28: e-letter: "Time To Get Out the Popcorn...Not" I don’t watch the news or read the papers. I don’t watch commercials either. I don’t post stuff on social media any more either. Why? For the answer and investment implications that are very different depending on whether Biden or Trump wins. See the full letter: https://lnkd.in/g_uNdhGr

We added a new version of free cash flow yield to its Stock Rating system. We think it's going to make a proven-superior system even better. We also added all-cash and no-cash versions of ROIC, free cash flow and economic earnings. Details here on the new 2-Year Average Free Cash Flow (excluding cash) Yield and other new calculations for clients: https://lnkd.in/gRSJ8izC

Return on Tangible Invested Capital (ROTIC) - why it can be more important than ROIC. Return on tangible invested capital (ROTIC) – formula in Figure 1 – provides additional insights into the profitability of businesses, particularly those with large goodwill and intangibles on the books. Figure 1: see full article here: https://lnkd.in/grWzUUm4 ROTIC provides insights into a company’s profitability by removing goodwill and intangibles and is particularly useful for companies with large acquisitions in the past. As Michael Mauboussin puts it: “The simple answer is that I like to see it [ROIC] calculated both ways [with goodwill and intangibles left in and taken out]…The longer answer is if a company has been acquisitive and I would expect them to remain so, I would lean toward leaving in goodwill. If the company did a huge deal, is saddled with a lot of goodwill, and is not active in M&A, I would lean toward removing it. The basic idea behind excluding it is that you get a better sense of the underlying economics of the business.” Bill Nygren of Oakmark Funds further notes: “I don’t see it as an either/or selection [either ROIC or ROTIC]. If you are assessing how well the company allocated its capital when it made acquisitions, of course you want the denominator to include the full cost of those acquisitions, not just the tangible assets that were acquired. If, however, you are making projections about returns from future investment for organic growth, then you would not want the denominator to include the acquisition premium.” Check out this guest post, The Importance of Going into the Model on The New Constructs Platform to Get the Full Picture of Business Quality, for more details on why ROTIC provides additional insights when analyzing companies. Figure 2 shows the companies with the highest and lowest ROTICs as of June 26, 2024. Full article here: https://lnkd.in/g32b9qzc

June 18 e-letter: Not Buying Tom Brady’s Patriot Hall Of Fame Speech I like to believe in a world based on reciprocity and karma: you get what you deserve; what goes around comes around. Output is a function of input. You work hard, and you get good results. Always. Just like Tom Brady said in his recent speech at the Patriots Hall of Fame. <Full letter here: https://lnkd.in/gWyk64_u> But, there is more to the story, and in the end I’m going to show you how this applies to your investing and how we may be able to help. Figure 1: Tom Brady’s Patriot Hall Of Fame Speech: Source: YouTube He went on to say: “To be successful at anything, the truth is you don’t have to be special. You just have to be what most people aren’t: consistent, determined and willing to work for it.” At first, I thought wow, great quote. Yeah, I like that. Just keep grinding and good things will happen. It is 100% true that your chances of success are greatly diminished if you do not grind. But, it is not 100% true that you will be successful if you do grind. I think Tom means well, but Tom is selling the wrong message. Tom is not telling the truth. “To be successful” you need some luck or grace or blessings. Whatever you want to call it – you need something beyond what you control to be successful. No one, no one controls their destiny. There are no guarantees. The universe is not fair. People do not always get what they deserve. For example with Tom, he had lots of luck/blessings/grace. First, his genetics are above average: Height 6′ 4″, Weight 225 lbs, and he was smart enough to graduate from University of Michigan. He was born in the United States into a good family (I am not a biographer or expert on this topic). Drew Bledsoe got hurt. The Tuck Rule (cough-cough). You get the idea. Tom had a pretty good set up compared to most people.    Don’t get me wrong. I am not a fan of the idea that I cannot control my destiny. In fact, “It’s the Journey Not the Destination” has been one of my least favorite quotes over my entire life. I have always felt that if you do not make it to your destination, then what the heck is the journey worth. Why work toward going somewhere if it is not going to get you there? Who in their right mind would do that? <Full letter here: https://lnkd.in/gWyk64_u> Life has a way of teaching you things whether you want to learn them or not. Very slowly over the last 52 years, I have started to accept the fact that I do not control my destiny. No matter how hard I work... I cannot control what happens. There are many forces far greater than me that affect what happens. Now, does that mean I pack it all in and do no work? Hell no. That’s giving up and pretending we have no control over our lives. I am not saying we have no control. I am saying we do not have 100% control. There are other forces that affect life beyond ourselves. So, what do we do?