Here’s what I do… I look at how the company handles depreciation and amortization of its assets. If management is trying to inflate earnings, it is highly likely that management will be aggressive in making aggressive estimated useful life assumptions behind D&A.
- It’s really obvious to the accountants that they can inflate earnings by making more aggressive assumptions here.
- Pulling this lever is perfectly legal since these assumptions are inherently uncertain and therefore subjective. No one will go to jail for pulling on this lever.
- All companies have to make assumptions on this accounting topic.
Here are some shortcuts that I use to quickly figure out a stock.
- Mysterious price spikes on high volume and little/no news. Sometimes, these coincide with stock promotion like an email blast, physical mailers arriving, etc. etc. A stock that has many of these spikes is probably an egregious pump and dump.
- The stock IPOed during the Dot-Com era and has been on a slow decline since. Usually these Dot-Bomb wreckages are a decent place to look for shorts. A lot of questionable stuff went public during the Dot-Com boom. Such stocks have a tendency to stay somewhat questionable. Pedigree matters.
- The share price performance since inception isn’t very good. Usually a sign of a bad or mediocre underlying business.
(*Disclosure: I am short.)
Hollysys is a Chinese company that designs high-tech stuff. Interestingly enough, they were able to grow revenues, profits, and operating cash flow without having to increase capex. See the chart on the left from page 31 from the latest investor presentation:
Key points in CONN’s latest 10-K
- Omitted the static loss table found in previous 10-Ks and 10-Qs.
- Removed the following sentence: “Under our current policy, the maximum number of months an account can be re-aged over the life of the account is limited to 12 months.”
I guess I will continue to hold my short position in CONN. While I don’t entirely know what’s going on, this does not smell right. (*The borrow is expensive.)
In my experience, the cost to borrow shares is a far more powerful predictor than short interest. Anybody who looks at short interest instead of the cost of borrow is probably not that savvy.
I tried to figure out what the CWC merger structure was about. You can access my spreadsheet here: https://docs.google.com/spreadsheets/d/1c_31Z-eoxXAPc1TfeOMjgdirZu-nk54DHwGKXSlOao8/edit?usp=sharing
- The way the merger is structured is that the Recommended Offer gives you the most value from a merger arbitrage perspective. However, you will get a very low mix of LiLaC shares. What Malone is doing here is luring institutional investors into taking a high proportion of Global shares rather than taking (relatively) undervalued LiLaC shares.
- Since the merger details were announced, Liberty Global has fallen by about a fifth. So you should do your own homework as to the relative valuation between Global and LiLaC.
In general, stock exchanges have a perverse business model: they sell out their clients (investors) to market makers. They give special trading advantages to market makers, who then use those advantages to fleece investors. Now one of these stock exchanges (BATS) wants investors to buy their stock. I doubt that it is wise to buy stock from people whose business model is built on cheating you.
I’d be interested to see which institutional holders participate in the IPO. It will be a who’s who list of clueless portfolio managers and those who enjoy the graft that investment banks send their way. (If investor interest is strong, there may be some Jim Cramer types who immediately flip their IPO shares for an easy profit. While this practice is not entirely kosher, any portfolio manager who does this is at least trying to make money; I would not classify them in the stupid category. If these money managers care about their clients, they would flip these IPO shares in client accounts rather than their own personal accounts.)