We seek to identify early signs of fundamental weakness, long before they are incorporated into Wall Street analysts’ estimates. We review companies for “quality of earnings” factors, including analysis of footnotes, operating earnings momentum, and balance sheet/cash flow ratios. “Grass roots” research is also conducted, which includes discussions with customers, suppliers, competitors and/or governmental agencies to determine if investors’ expectations are justified.

Below are some “red flags” we look for:

FINANCIAL CONFUSION
Companies use a string of “special charges” and acquisitions that make it difficult to determine how fast the company is actually growing. These activities are usually undertaken by companies that are trying to hide significant problems in their main businesses. View Sample

AGGRESSIVE REVENUE RECOGNITION
There is no better sign of impending troubles than to find that a company is accelerating the rate at which it recognizes revenue. Sometimes this accounting procedure is clearly spelled out in the footnotes, but often times it is evidenced by a growing balance in accounts receivable. View Sample

GROWTH BY ACQUISITION
Companies whose only source of growth is through acquisitions are often forced to overpay and must continuously find larger firms to buy. These problems often lead to large goodwill balances, unmanageable debt levels, write-offs, and deteriorating balance sheets. View Sample

SPECIFIC ACCOUNTING PROBLEMS
Occasionally we discover a particular accounting practice that is allowing companies to distort economic reality. The accounting practice is allowed by GAAP, but the earnings, as measured, are often more imaginary than real. View Sample

"NICKS AND DENTS"
Often we find companies that have lots of little accounting problems, rather than one big problem. The issues often seem small, but the accumulated total over several quarters can become significant. View Sample

WALL STREET MISCONCEPTIONS
We find some situations where Wall Street’s “bull case” for a stock does not stand up to careful scrutiny. We warn clients when there are large holes in the bull case. View Sample

INDUSTRIES IN DECLINE
Just as companies evolve from rapid growth to maturation, to decline, the dynamics of entire industries can move from positive to decidedly negative. View Sample