Investment Analyst Recruiting Webinar for New Constructs

Hello everyone, this is David Trainer, CEO of New Constructs. Thank you for joining the meeting today regarding our investment analyst position. Please feel free to ask questions at any time, now during the meeting through the question system in the webinar. You can also email us at recruiting@newconstructs.com, publishing@newconstructs.com, Hit us on Twitter, Facebook, anywhere. We'd love to hear your feedback. The format today is to go through some slides to give you a background on kind of what NuConstruct is about, show you how to use our website, talk about the next steps, and then, of course, field any questions you might have about how things work for us. So, with that, I'll give you a little bit of background. I'll jump into some slides. The genesis on new constructs really comes from beginning as an auditor. I remember the first thing I was told by my manager on my first job was, don't worry about those financial statements. If we make any mistakes, we'll fix them later in the footnotes. And this was with Arthur Andersen in the mid-'90s. And I moved on to executive compensation consulting, and there was sort of a similar message. Where we prepared pitches to boards of directors focused on this key pitch: whatever you do, don't pay executives based on accounting earnings because they can grow accounting earnings while running the business into the ground. Then Credit Suisse brought me on to run global forensic accounting and valuation and build a global template, and that's really where the genesis of, of sort of this methodology was put into action. The ideas are timeless. They go back all the way to Adam Smith when he talks in Wealth of Nations about the difference between accounting and economic earnings, Al Rappaport in Creating Shareholder Value, Bennett Stewart in Quest for Value, the Valuation and Measuring Corporate Performance books by McKinsey. So It's basically— these aren't new ideas. It's all about execution. And execution is where New Constructs is unique, in that we've developed technology to save the time and money required to build these really sophisticated models. But the first thing that really sort of you need to understand is that Wall Street research is not really what it's cracked up to be. It's highly biased and incomplete. They're in the business of making themselves money first and foremost. Now, if that happens to align with the best interests of their clients, Great. But if it does not, you have 2008, you have the tech bubble. And having lived through both of those, and especially on Wall Street having a front row seat to the tech bubble there at Credit Suisse, which is sort of the thing, the single largest tech banking firm, investment banking firm during that time, I've got a lot of interesting, uh, experiences. And, uh, I can say that the amount of money made by the bigwigs there dwarfs what most people believe was the case. I'll put it to you this way. Credit Suisse got fined over $1 billion for basically writing research that said that these IPOs were great, when in reality, they— some same people writing those research reports were firing off emails after publishing those reports saying, I can't believe anybody's stupid enough to invest in this piece of blank. They got a $1.2 billion fine. That was probably less than 10 or 20% of the profits the bank made during the banking era. So, you know, look, if you don't want to take my word for it, there are independent studies, this one published by MarketWatch, pointing out that over, you know, out of a survey of 250 CFOs, 20% of them admit that their earnings are fudged by a magnitude of about 10%. And that the sell-side analysts or the research firms don't pick up on that. Financial Times did something similar where they effectively— a Wall Street analyst confessed that buy rate— that ratings don't really matter. You know, most institutional investors will tell you that, you know, look, we don't pay attention to the ratings. Most people don't always— the average investor doesn't always know that, but it's definitely the case. And it's not necessarily because these people, you know, don't want to do it. It's extremely difficult and time-consuming. It takes a lot of expertise. And these filings are incredibly long. You know, when I started in the business in the mid-'90s, you know, 15 was about normal. You know, 45 was a long annual report. Now we're talking on average 200 pages, as long as 2,000. And it's not like it's comic book material. It's very complex. And if you're looking at the SEC to save your hide, probably not going to happen. I've worked with the SEC. And they've got so many data points and so many companies and so many constituents. You know, they're only required to read an annual report for every company once every 3 years. So there's a lot that companies can slip between the cracks in those timeframes. Financial Accounting Standards Board, look, they're doing the best they can to keep up with the dynamic nature of business. And sitting on a committee that works with the With the FASB directly, I can tell you disclosures are getting more numerous and more complex, and that's the way they need to be to reflect the dynamic nature of business, the robustness of businesses. It's just hard to do. And you know what the bottom line is? Income statements and balance sheets by themselves, especially an income statement, are just not enough to understand a business. You need all that information in the footnotes to be— to really understand. There's no substitute for that kind of information. Okay. due diligence and hard work. People that use our work include the top wealth management advisor accounting firms in the world. They rely on us to go through the filings and do the diligence that they don't always have time to do. There are a few firms out there, you know, that do this kind of work, but they tend to be, uh, tend to be smaller hedge funds, and that work of course is proprietary. So if you're looking for research that does real fundamental analysis, you're not gonna find it anywhere. We've been highlighted in all the major publications, in particular Barron's, quite a bit to talk about, you know, the best forensic accounting firm out there. They highlighted us as the best forensic accounting firm. What does this all mean? Well, we're going in and finding things that other people aren't finding. This is a chart over 5 years, 2009 to 2013, showing the number of hidden items that we found in the management discussion and analysis section of filings. And the management discussion and analysis section, or the MD&A, is significant because XBRL, or Extensible Business Write-Up Language, does not cover the MD&A. And yet we're finding on average one unusual item, material unusual item, for every company that we cover, which is about 3,000. An unusual item is a non-operating Non-recurring gain or charge that meaningfully distorts the income statements or the income statement. It's buried in cost of goods sold or SG&A or something like that, but you don't— you won't see it on the income statement. We do similar adjustments to the balance sheet. This is a sample of the write-downs we've been pulling, about $33,000 just over the last 6 years or so. These add up over time as well, and they make a big difference. We're not just about pulling data, we're about putting the story together. This is where the investment analyst position really comes in. We want you to leverage all this awesome data that we pulled together and write articles, find ideas. Here's one, my original blog post, March of 2011. And what jumped out at us here was that this company, Eastman Kodak at the time, had a pension assumption that its plan assets were going to earn a return of 8.7%. That happened to be the single highest assumption of all publicly traded companies in the fiscal year 2010. It helped them boost their revenues by over 2% and their earnings by many, many multiples of that amount. And they did all this, they made all this money from a pension that was underfunded by $2.6 billion Or 3 times the company's market cap at the time. At the same time, the stock price implied a 10% compounded annual growth rate in net operating profit after tax for over a decade. Expensive stock, misleading earnings. When you take out this, what I would call false pension fund income, you had a very unprofitable business, and yet the valuation implied a significant growth in profits in a business that really didn't have a lot of great growth prospects. And it was a pretty easy call. 9 months after we wrote the note, stock was down 90%. This slide is one that some of our regulator colleagues love, especially those that deal with fraud. What we found is a very high correlation between fraud and write-downs. And in particular, one of the poster boys for this example is Dynergy. And for them, in the 3 years prior to getting busted for fraud, we collected 16 charges equal to $3.85 billion. That's after tax, which meant that for every dollar of assets on their balance sheet, for every dollar of assets they were recording on their balance sheet, they'd written off $3.46. For every dollar of assets on their balance sheet, they'd written off 3.5 times that much, almost, almost 3.5 times. Not a sign of a business doing well. So for our clients, value proposition is to have the best fundamental data in the business, the best earnings quality and valuation models in the business, really the best protection from the details that they don't have time to check in SEC filings. And that's where you come in as an investment analyst, not a financial analyst, but as an investment analyst, to— so that we're not just putting data out there that nobody understands, to help us join the dialogue about stocks by putting these things into stories, into a narrative, like the Eastman Kodak situation, like the Dynergy situation, that helps make this a much more digestible product for the investing marketplace. We're completely unbiased and independent. We don't take fees from any Wall Street firms or companies themselves. We provide unadulterated expertise in accounting, finance, and SEC filings. We're here to help our clients. We're here to do research with integrity. We cover 3,000 stocks, 400 ETFs, and 7,000 mutual funds. These securities ratings are updated daily. We provide ratings as well as reports. We provide screening tools. We have monthly newsletters for stocks, quarterly newsletters for ETFs and mutual funds. We have a pick of the week. We have a danger zone pick of the week across ETFs and mutual funds where we're generating ideas. That's where we want to bolster our staff. in writing up these ideas. Monitoring, we'll send you daily emails anytime something changes. We'll send you a weekly review of your portfolio. You can access our system through anywhere. This is what— this is sort of what the portfolio page looks like. This is what the ratings page looks like. And I'm going to jump now into how our model works. So you go to our website, and all of you should have credentials to log into the site. And it's as simple as going to newcontracts.com. And what you'll see here on this page is a portfolio page. And, you know, you have access to our full access institutional system, which means you have access to as many portfolios and as many stocks as you want in the system. And again, here you can sign up for alerts if you want to, you know, get daily updates or weekly reviews on whatever portfolios you care about. Gotta save that if you want it to work. You want to create portfolios, you just click the edit button here. You can create a new one, type in a name, blah blah blah blah, create up a new one, etcetera. Rename one, remove one, etcetera. And if you want more detail on a particular company, you click on this icon and it will give you more detail on the rating. We'll have analyst notes, which will highlight any recent changes. Like for example, Athena Health was added to our most dangerous stocks list. For January 2016. You'll see that our ratings focus on 2 quantitative measurable elements of a stock's risk-reward, required to measure a stock's risk-reward. It's the quality of earnings. Really, how— what is the real health of the business? And we break that down into 2 parts. How do the economic earnings or the real cash flows compare to the reported accounting Right. Here we see a misleading trend, which means the company's profits are positive and rising. The reported profits are positive and rising while the economic earnings are negative and declining. So we're getting a misleading read from the company's reported financial statements. Now, this has nothing to say about their non-GAAP financial statements, which are often even worse, almost always even worse or farther away from the profit truth than accounting earnings. Return on invested capital is the other key metric. That's the cash-on-cash returns of the business. How much cash flow does the business generate relative to how much capital has gone into it over its life? This is, to me, the most truest, natural— most true, most natural measure of profitability for a business. It's the one sort of version of the truth that is apples-to-apples across all businesses around the world. And I think new constructs does the best job in the world of measuring that value, creating that metric. Valuation is the other type. So one part of our analysis is, is you put in the bucket of profitability, quality of earnings. The other is valuation. Free cash flow yield is the real cash flow yield. It's the real dividend yield. It's the unlevered cash flow available to all stakeholders divided by enterprise value. The price-to-EBV ratio. Price-to-EBV is like the price to no-growth value of the business, right? So it's the price divided by the economic book value, and the economic book value is the no-growth value of the business. And we measure that by looking at the perpetuity value of the existing cash flows. Growth appreciation period is the number of years of profit growth baked into the current stock price. Now Athena Health is on our most dangerous list obviously because very poor quality of earnings and a very expensive valuation. Anytime you want more details about how our rating methodology works or anything, click on that link and it will go into great detail into every single element of our rating system. We also have an education section of the site. Which will go through all the loopholes. It's a white paper on every single one of our loopholes. It goes through not just exactly what the treatment is and how it affects net operating profit after tax, but we also talk about the biggest offenders. And we don't talk about them just in this year. In the last fiscal year, we found, it says here, nearly 9,200 hidden items, hidden non-operating expenses only. Not including income across 2,000 companies, right? But our database has over 34,000 of those that we've pulled out over the last several years for a value of $453 billion. So, you know, we're looking at not just the frequency but also the magnitude of the adjustments. So we're not just trying to make up stuff to be interesting in terms of adjustments to alarm people. There are people in the business that do that. We don't. Here's some great papers on Accounting 101, Finance 101. About value investing and Investment Strategy 101, Valuation 101, you know, how we look at the world, definitions of all the metrics again, key methodologies. Great— the takeaway is a great section there on education to help you understand how we do things. Now, when it comes to valuation, I showed you those 3 metrics. You know, one of the things our clients really love about us is the models, right? Our bigger customers really rely on us mostly for the models, and our discounted cash flow model is by far the best in the business. And I'm going to walk you through what that looks like. So this is the DCF page, the decision page. You can see every model comes with a default scenario baked into it. What this shows you is that in order to justify $68.51, you have to grow revenues at At 4% with about a return on capital that is about equal to the cost of capital for 17 years. That's what's baked into the stock price. This blue line reflects the values implied, the value, the share prices implied for different growth horizons. There are 100 different growth horizons, 1 to 100 years in this model. We go out for 100 years. Why? Well, when I first started building these models in the mid-'90s, I did it for 25 years, figured that would be far enough out to look. But by the time we got into late 1997, most of my company models were implying growth beyond 25 years. And so when it came back to building another model, I figured, you know what, this needs to be at least 50 to 100. And on the off chance that we ever got over 50, I said, the heck with it, I'm going to make it 100 so that we'll never have to build a bigger model again. If you want to create a different forecast scenario, You just click on this tab here, and you can create your own scenario, put in your own estimates for revenue growth, the pre-tax profit margin, the cash tax rate, your incremental working capital, and your incremental fixed assets. These are all the things you need to forecast cash flow. So, like, for example, if we wanted to be a little more pessimistic, for Dominion Resources. We say, you look, instead of a 26% margin, let's say it's going to be 22%. So we throw this into the model across all years, right? And let's say revenues are going to be a little bit— you know, our models come with consensus revenues baked into it. So let's just say instead of 4, you know, instead of 4 or 5%, it's going to be right at 4%. We'll save this off as pessimistic. And what this is going to do is generate a new discounted cash flow model scenario that gives us some insight as to what the valuation implications of this scenario are, and then also as a point of comparison to the default scenario that's already in the model. Well, lo and behold, when you change the forecast here, you get a lower— you get a longer Growth appreciation period. Growth is about the same, profitability is about the same, but now you need 27 years, right? With that lower margin early on, right, and that lower growth rate early on, it now takes a longer amount of time to get to generate the kind of profits that the current stock price implies. And you can see it knocks the rating down from neutral to dangerous. If you wanted to see the discounted cash flow model behind all this, here it is. This top part of the page is analyzing all the stuff that the forecast page controls, right? This is all the free cash— sorry about that— all the free cash flow stuff. You got your revenue, your profit margin, your pretax profit margin, your after-tax profit margin, working capital, fixed assets, total change in capital to give you free cash flow. Find the present value of that, accumulate that terminal value, which is a no-growth terminal value. Find the present value of that, get you the corporate value. These are all the adjustments we make to get to the total value or the shareholder value. Anything with a green dot next to it means it can be adjusted. We're not in the business of selling religion. We're in the business of doing work to help our clients be more efficient. We're turning over all the stones buried deep in those filings so they don't have to worry about it. Or spend the time doing it. If you wanted to see the weighted average cost of capital, it's here for you. You can change that as well. Financials and metrics give you historicals on all our key values going back over time, back to, in this case, 1998. 1998 is the first year when filings were available in public, in electronic form. If you want to see the filings from which the data actually comes, no one else in the business offers this. You click here, you can see, oh, here's where we parsed the income statement, right? Here's where we parsed— here's where we found these non-operating items in the filing. Here's the $374 million of charges associated with North Anna and offshore wind legislation, right? That's a non-operating expense. Asset write-downs. Buried somewhere in the middle of the filing, net impairment recognized. This is impairment losses on investments held in nuclear decommissioning trust fund as follows. We're jumping through the filing, right? Here's the— here's where the pension status is. The LIFO reserve. Right? You know, all in all, this filing's probably a couple hundred pages long, right? We're taking our clients straight through to the parts that matter most. That's the power of the model. Screening tools, easy to use. If you want to find, if you're interested in a healthcare materials company, companies that have a very attractive or attractive rating and a market value greater than $1 billion, Filter, and there's your list. So that's how the system works. That's what we're about. Now, your assignment is to write an article like the articles we write. That's the next step here, and you'll be getting an email to that effect at the end of this presentation. But our log ideas are very simple. There's a template here, okay? I want you to give a kind of a quick takeaway, right, for what you're talking about at the very top. And then you talk about profitability. You talk about profitability versus the competition. You address the bear case. You talk about valuation. You talk about share buybacks and dividend yields, right? Because in some cases, if you add up the buybacks— in this case, we're thinking about $120 million per year is fair— plus the 3.7% dividend yield, You get a 4.4% yield. That's all money coming back to investors, right? Catalyst, and we talk about insider issues, insider trends, short sales, then executive compensation. You don't need to worry about the impact of the footnotes adjustments. That would be a value-add if you put that into your article. Now you can write a long idea or you can write a short idea. The Danger Zone articles follow a similar format. And by the way, these are all available on the site for you to see, right? We're not asking you to recreate the wheel, do anything new. That's a big part of what's going to go on in New Constructs. All of our analysts and all of our folks here get enormous amounts of support. We have an internal wiki that shows how to do everything, including write these reports. And these reports are detailed. The templates for these reports are provided in great detail. So, you know exactly what to do. So, the idea, the focus is not having to put together a bunch of charts and gather a bunch of models. No, you're standing on the shoulders of our analyst team and our technology that's already done that. Your job is to go out there and find companies that are really kind of broken. And we have the numbers to help you do that, but then you get to put some narrative around it. So, it's really pretty fascinating. We get a lot of press for this. I didn't talk about this, but we've been— yet we'd have been in Barron's 16 times in the last year plus, couple years. We— you'll see that, you know, we get featured in the media and so will you. Forbes a bunch of times, USA Today, you know, already this year, 3 mentions, 2 in Forbes, 1 in USA Today. CNBC I'm on fairly often, MarketWatch, Chicago Tribune, Washington Post, Barron's, Barron's, Kiplinger's. Anyway, you get the idea. We're doing good work here. So back up to danger zone. Again, start out talking about profits or the lack thereof. And we'd like to— we always like to compare, you know, people focus too much on the top line. So how does revenue compare to profits? A lot of times these danger zone picks, we see them going the opposite way. All right, how do we compare to competitors? Profit level, really, and profit level speaks to competitive position as well. Address the bull case. Talk about valuation. Talk about valuation even if you assume an acquisition. This stuff gets a little bit complicated, so it's not critical that you do this part. I do need a catalyst. I want you to talk about insider activity. I want you to talk about executive compensation because it is a big red flag if they're getting paid based on non-GAAP earnings, right? And we've got some good articles on How Non-GAAP Earnings Boost Executive Pay at the Expense of Shareholders. Done a lot of cool work on that. So in summary, if you're interested in the position, the next step is for you to write— to use our research to write a long idea or a short idea. Follow our template, right? You want to hit on these 9 items. You've been given full access to our research tools. If you want to copy this presentation, just email us at publishing@newconstructs.com and we'll get you a copy. You'll get an email with this detail about the next step, and otherwise, we look forward to hearing from you. I've got a couple minutes here for questions. Not seeing any questions, so we will finish this up. I had a couple questions that did come in during the meeting, which I've already spoken to. One important one. Is that this position is different from the financial analyst position. Financial analysts are the ones who actually work on the models, parse the data, work on the technology, really run the business. The investment analyst position is the one that writes narratives or business or stock ideas, mutual fund and, and ETF research reports, uh, on the companies we already cover. Our mutual fund and research— our mutual fund and ETF research is very unique in that it focuses on looking at mutual funds and ETFs like a collection of stocks. And so we rate the fund in the same way we rate a stock. We have additional rating elements for asset allocation. We don't think people should pay mutual fund fees for their money to be in cash. And then we look at the total annual cost, which takes into account all costs of being in the fund, including turnover and front-end loads and back-end loads. And you'll see our reports are also very different, where you get to see exactly how the portfolio is allocated to good and bad stocks, right? 2% go to very dangerous, 25% to dangerous, 36% to neutral, 12% to attractive, 6% to very attractive. And we compare that to the benchmark. There's detail on costs as well. So, you know, a little more detail on the role of the associate analyst versus investment analyst. The investment analyst is going to be in the— his focus is on writing reports, as you see in the investment research section. That's your primary job, is to put those together, to publish our Danger Zone ideas, the long ideas, to syndicate them, to support Kyle, who's the head publisher, and all of our publishing, emailing, and digital marketing activities. So you are in many ways like a traditional Wall Street equity research analyst writing research reports, but you're going to be doing it across all kinds of companies. You won't be siloed into a particular industry, and you're going to be sitting on top of or leveraging the best models and database in the world for understanding the the fundamentals of a stock, fundamentals in terms of its underlying valuation and its underlying profitability. And again, I believe we're the best in the world at analyzing those things, which is why we have, you know, the, the high-profile clients and partners that we do. Thank you. And if you have any questions, feel free to give us a call and we will follow up. Thank you. Again, the key advantage to working in new constructs is that you're going to learn how to do profit— look at profitability and valuation the right way. You're not in a sales position. You're in a position where you're going to learn an enormous amount about how to understand the profitability and valuation in really what I'd say the right way. Many of our analysts have gone on, and even our interns have gone on, to blow the doors off of their classes, whether Columbia Business School or undergrad. And know as much or more than their teachers when it comes to valuation and financial statement analysis. You learn a lot. You get— you do work that makes a difference, that adds to the transparency of the marketplace as opposed to taking away from it. And at the same time, provides what I believe to be some good advice, a different voice out there than the prevailing sort of market pundits. Okay, thanks very much. I appreciate you being with us today.