Special Professional Member Training Session - Making It Look Easy

Now let's do a live demonstration in our rating systems, and I'll show you how we do a quick dive in our utility sector analysis. Please note, only professional members have access to this, so be sure to pay close attention. So let's go here to the system. All right. We'll go to our sector ratings, and I'll go in here and we'll take a look at utilities. So by the way, utilities not ranked well. We've done a lot of extra work on utilities. We did a lot of extra kind of cost of capital work on these guys because, well, they're regulated. So what can you see on this page? Quick links to buy the best, avoid the worst. Click on this, bam, takes you straight to our screeners summarized. For you, here's a breakdown on how many stocks get a good or bad rating, the percentage. So you can see there's one attractive stock, but its market cap is so small it doesn't even register. So we're breaking down the sector based on the number of good stocks and the percentage of capital or value allocated to good and bad stocks. And we do the best sector stocks. There's not many that make the list. There's the one market cap's awfully small. The worst sector stocks, best sector ETFs, there are none. Right? We're not gonna put something out there if it doesn't exist, folks. It's honest. We can't say something's good if it's not just for the sake of being able to make people happy. And trust me, I've run into this. I've sold research into the biggest banks and advisory firms in the world. And you know what the good ones say? We can't live without it. You know what most of them say? Oh, you actually say that you dislike stocks? Oh, we can't have that. Oh yeah. I had a chief investment officer, one of the largest RIAs in the world, say, oh my God, David, I need this. This is going to help me get out of trouble with the SEC. This is a way for me to show we're actually doing diligence. He took me to his compliance people, thought it was going to be a slam dunk. You know what they said? Oh, you have negative comments on stocks? Well, I mean, if any of our people allow any of our clients to have any of these stocks with a negative rating, well, we could get in trouble. So guess what? We'd rather not know. They passed on new constructs. Unbelievable. This is what you're up against, folks. Good mutual funds, bad mutual funds don't have it. And then here you get to see at the sector level, economic and accounting earnings. So you can see part of the why it's getting a bad rating, because the overall sector, guess what? Oh, that's showing accounting earnings going up. Economic earnings are going down, folks. The business is getting worse. Free cash flow down. Price to economic book value up. Getting more expensive while the economics are getting worse. That's not good. Not good. Enterprise value up, free cash flow pretty much flat. And we got a bunch of other stats, very, very deep research for the sector. A lot of people talk about trust. How many do you think can really trust it? You can really trust— how many people, how many other firms can prove to you that they're trustworthy? At New Constructs, we believe in proving it to you because we can. We can transparently and authentically show you how we recommend all of our recommendations, how we understand our data is truly valuable. Now let's do another live demo. Adobe. Okay. Classic good company, bad stock. Great profitability, but it's all priced in. You see, this is up over 100 years. Not a good sign. Not a good sign. Very expensive. You want to check out the credit rating as a pro member? There you go. Look at that. Oh, amazing credit rating. It doesn't surprise me given that the quality of the business is so strong. So you get 56— 46% return on capital, super high. If you wanted to see how high that is across the entire market, you just go to the screeners and you could go in and say, okay, I want to rank the entire market based on return on invested capital. Unfortunately, it puts the zeros at the top, but you can see here's the whole market return on invested capital. Right? You could do that by sector very easily. There's return on capital by sector, right? You can do that by rating as well. Super fast, amazing screening, right? So back to Adobe. What else do we talk about? Well, we can look at the rating history. We can do a breakdown into the rating so we can see how economic earnings compare to accounting earnings. So economic earnings are positive and rising, but they're still below accounting earnings. That's not ideal. Return on capital really steady and rising. We love that margins come down a bit, but capital turns offsetting that. That's why you're seeing return on capital go up even though margins are going down. Free cash flow yield looking strong. Not a great number, right? These are pretty low, single digits. Again, it's a great business, great business, but not a great stock, which is why the yield is so low, because your enterprise value is so huge. Even though it's come down quite a bit here in the last year. Price-to-economic book value ratio. Here's why I was showing you the distance between these 2 lines is how much risk. Risk is higher when the, when the distance is higher, right? And you can see the economic book value staying pretty low, right? I mean, compared to the stock price, that's, that's a sign of it's really expensive when so much of the stock price is dependent upon future growth. Not a good thing. And here's a summary of our reverse DCF model. There's the 100 years. There's 100 years. All right, Kyle, what's our next one? Ticker FANG. FANG. Oh yeah, I remember this stock. Diamondback Energy. So not looking so great, but looking pretty cheap. If you believe that the economics of this business are going to turn around, then this would be a great stock to buy. If you believe that Right now they're suffering because oil prices are low and the business is going to turn. This would be a great way to go. Look through ratings. Looks like economic earnings have come down quite a bit, well below accounting earnings. Return on capital was much higher, come back down. So if that's going to go back up, could be good margins. This is all probably, you know, related to the price of the underlying commodity. Free cash flow took a big drop. I guess they did a big acquisition here. All right, not a good sign, not a good sign for capital allocation. So I think this is, you know, it makes me wonder a little bit. Yeah, free cash flow, you can see economic book value took a big drop here, now below the stock price. Way above, looks like the market knew something bad was going to happen here for a while because the economic book value was way better But bam, maybe market knew that this management team was prone to spending big amounts of capital on acquisitions that would ultimately hurt shareholder value. Let's see if there are any hidden liabilities here. Here's another interesting thing about new constructs. We will show you exactly how we make all of our adjustments. So you can see here, here's reported net income. Here's our NOPAT. So very rare for NOPAT to be above net income. But you can see this because we're giving them credit For a bunch of non-operating expenses. We're pulling that out. These are the hidden ones, right? If you wanted to know what the hidden expenses were, you just click here. This is part of our transparency in new constructs. I'm going to go in here and say, okay, income statement adjustments. Where's that $76 million come from? Oh, here it is on page 95 of the filing. Revisions and estimated liabilities. That doesn't affect the underlying economics of the business. This is accounting change. That's a non-operating expense. We pull it out so that your earnings number is fixed for that. That's why our core earnings number is better, right? Great example of the transparency you get for new contracts. By the way, this is in filings going back to when the company IPO'd, 2012, all the way quarterly Ks. Boom. You want to know why Ernst Young could write a paper? Harvard Business School could write a paper about new contracts because guess what? They can audit all of our data right back to the source. Here's a summary of our adjustments. This is all part of your, your Pro subscription where we go into detail around like how, how, how are notepad adjustments looking? They're getting worse or better. You see a little bit worse. It's not always a good sign. Balance sheet adjustments, better or worse? Yeah, getting worse. Huge increase in net assets here. Huge increase in net assets here. All right, Kyle, what's our third one? Change it up a bit. Someone had the Russell 2000, so we'll look at the style ETF for that, IWM. Okay, real quick though on Diamond Energy, right? Credit rating not so good either. Couple flashing bad on a couple of these after that acquisition. Free cash flow is bad, not a lot of cash left. So, so rub it in here. What would the traditional metrics show you? Well, that's one of the things we specialize in is always showing you what the market shows and what other people think and how we're different. When it comes to debt to total capital, not that different. When it comes to EBITDA to debt, not that different. When it comes to free cash flow to debt, very different. The adjusted free cash flow way worse than the unadjusted. Folks, better data makes a difference. Are you going to get this from the credit rating agencies? No. S&P, Moody's, are they doing this kind of work? I don't think so. You want the truth? We're the only place that has it. We're willing to do the work. And you never know. See, all these metrics, they look the same except for this one. And by the way, that could be the canary in the coal mine that you need to know to avoid something. All right. Sorry about that. Here's this click for the sector ratings I showed you before. We saw the top 2 sectors. Utilities is the worst. But going back to our ratings, we, IWM, we do ratings on stocks, ETFs, and mutual funds. And you can see this is a rating on the overall market proxy for the market or ETF based on the holdings. Nobody else does this kind of work. We're going through, we're building a model. We built a model for every one of the holdings. So when you aggregate that up, You're actually getting a real fundamental picture of what's going on, not just extrapolating past price performance. Very few people invest in stocks entirely based on past price performance. So why do you do that for ETFs and mutual funds? Well, mostly because it's all you got, unless you want to do new constructs. Look, it's not that hard to get better research. You just got to be willing to think a little bit outside of the box. A little bit outside of the box, and you can go to a world of amazing new better research at an incredible price. At an incredible price. Don't forget about our education. Huge education. Everything you want to know about everything we do—it's all here explained. Our methodologies, our our ratios, everything. We'll show you how to calc how we calculate this stuff. Here it is. It's time weighted. For average invested capital. You want to know the formula for economic earnings? There's the formula. It's all there. We show you how we do everything because we want you to know how hard we're working. We have nothing to hide. We have the opposite of nothing to hide. We're also tracking FASB because they're changing rules, which changes accounting. Someone's got to help you keep up with that stuff. Those are 3 great stocks I showed you in the utilities industry. How it works? Why don't we go with? We'll go with basic materials. What can you do in our stock screener for basic materials? You want to know all the good stocks, all the very attractive stocks and basic materials. Ready? Go! Click. There's the list. There's only three. All right, let's make it a little bigger. Very attractive. But let's say we want a ten percent free cash flow yield and greater. Go! How many of those are there? Six. Okay, let's say I need to make sure I know which ones to avoid. Immediately, we'll just look at focus on the really tough, on the really bad ones. Very unattractive, right? And we could break it down. Let's say, you know, if you're really into construction materials, where's the danger zone in there? Just one. Okay, what are the really good ones? None, right? This screening tool, what I just did to find you the best and worst, you know what it should cost you to replicate this? Hundreds of millions of dollars. To build the history, to build the model, to build the technology, to produce it, the website. One of our institutional clients says, yeah, David, he's really big into dividend yield. So you want to say, I want dividends and I want to go for the whole sector. I want that. I want a return on capital greater than 10%. I'm going to make it a little bit easier. Free cash flow yield greater than 5%. Go. Nobody. Let's make it a dividend yield of 4%. Maybe getting a little bit too greedy. Okay, let's make let's make it two percent. There we go. There's a couple. You get the idea. You do this across every sector. You do it across the entire market. You want to know how to find the best stocks, avoid the worst stocks based on real due diligence. There's not a better tool in the world. Not a better tool in the world. Okay, thank you very much. Thank you again for being with us.