Our quarterly earnings quality (EQ) score is an objective way to identify potential accounting related short ideas and as a risk tool to avoid potential blow-ups in the portfolio. Our EQ Score uses seven financial ratios along with sentiment and valuation metrics to find potential underperforming stocks. The EQ Score ranges from a minimum of 0 (lowest quality) to a maximum of 100, and we rank companies within each sector on a relative basis, using ‘3Q 2019 reported financial information. This analysis covers ~2,000 companies, representing Russell 3000 companies with market cap’s over $250 million, excluding the FIN sector. See inside for details.
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The Democratic nomination process and presidential campaign should be pivotal drivers of market returns in 2020. In this note, we summarize key policy positions of the five candidates that we believe have the best chance of becoming the Democratic nominee. Overall, our sense is that Michael Bloomberg would be viewed most favorably by equity markets. With Elizabeth Warren recently softening her stance on ‘Medicare for All’, we now believe that a Bernie Sanders nomination would be viewed least favorably by investors.
Increasingly, over the past year, we’ve been focused on identifying potential short stock ideas/avoiding stock blow-ups. Our monthly short screens comprise the 13 most potent valuation, earnings quality, capital creation, capital allocation, and sentiment metrics we’ve found to be most useful in searching for ideas on which to complete additional fundamental analysis. These short screens represent the backbone of the investment process we use to dig deeper and identify the most compelling short ideas.
Danaher (DHR) [Market cap ~$97.8bn] announced that it will commence an exchange offer related to the split-off of its remaining interest (80.6%) in Envista Holdings Corporation (NVST). The exchange offer will expire at midnight at the end of the day on December 13, 2019. Envista generates annual revenues of approximately $2.8 bn and provides a comprehensive portfolio of dental consumables, equipment and services to dental professionals.
Reverse factoring (a.k.a., supply chain financing or structured trade payables) has come under increased scrutiny after contributing to several liquidity crunches and stock blow ups at international companies (Carillion and Grupo ACS). Disclosure in financial statements is mostly non-existent and the accounting is suboptimal as these transactions often result in understated debt balances and overstated operating cash flow.
Last night (11/13/19), China’s National Bureau of Statistics reported that Industrial Production rose +4.7% YoY in October (vs. consensus looking for +5.4% YoY and down from +5.8% YoY in September), and that Retail Sales grew only +7.2% in October (vs. consensus looking for +7.8% and down from +7.8% in September).
As we discussed in Monday’s morning (11/11/19) weekly note, Own Banks from Now to Year End, we believe that the median S&P 1500 Bank could see its ROE expand from 10.2% to 11.2% in an upside scenario in which the U.S. and China reach a comprehensive trade agreement that results in rising global growth expectations and a steepening yield curve.
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