Stansberry is launching a new high-end data-powered service in partnership with Joel Litman, and I’ve gotten quite a few questions about their first round of promos… so although I’m sure I can’t dig into the accounting as well as Litman, I’ll at least try to figure out which individual stock they’re teasing in these ads so you can get an idea of the kind of thing they’re recommending.
The big “sell” is that most of the financial media uses and obsesses over the wrong numbers — that GAAP accounting allows too much room for companies to make different choices that can either obscure or exaggerate their real economic returns — and that you should join up with Altimetry to get access to the kind of adjusted (or corrected) data that bit Wall Street money managers use (and buy from Litman’s research company, Valens, which is primarily a provider of data to institutions).
So this new service is a consumer-oriented newsletter from Litman, using this same Valens research to produce a monthly newsletter called High Alpha that offers small-cap stock recommendations as well as big-picture commentary and predictions for a launch price of $2,500 (nonrefundable). You apparently also get access to the data in some form, with a service he calls the “truth detecting system” — I assume this is some lightened-up version of the institutional Valens Uniform Adjusted Financial Reporting Standards database, since that costs $10,000 a year.
But since this is a consumer-oriented service, they sell it to you with the promise of a secret idea… in this case, their first recommendation. And that’s where the Thinkolator comes in… these are the clues we get:
“500% upside on this tiny stock
“It’s a company you’ve probably never considered before…
“It’s creating an entirely new social movement among a younger generation of Americans right now…
“But the company has been reporting misleading earnings that are 2.5 times less than the TRUE number….
“… reported Return on Assets [was] 10.4% in 2018… which isn’t very impressive.
“But we ran our forensic analysis…
“And discovered the REAL, TRUE number…
“Almost 3 times higher… and the stock market doesn’t realize it at all.”
So the argument is that Wall Street will eventually realize its mistake, and that higher return on assets will generate more earnings, and the stock will rise. In Litman’s words:
“Which means you could easily double or triple your money if you buy shares now, BEFORE this error gets corrected by the market, which we’ve seen happen in thousands of situations like this.
“Most people won’t know the REAL story of this company until after the stock has potentially tripled…
“But this is the first recommendation you’ll receive in our brand-new investment research service, High Alpha.”
The other clues about this stock are pretty light, but they’re sprinkled through the ad… here’s what I pulled out:
“The first thing you’ll receive is our newest discovery… a company with a near-30% earnings distortion we’ve uncovered through forensic analysis….
“Today – our newest discovery is an Iowa-based company that’s been reporting hugely distorted earnings to the public since 2017, as I’ll explain to you in a moment…
“The kind of discrepancy that could turn every $5,000 investment into $20,000 or more if you get in BEFORE the mass public has any idea.”
So we’ll feed that to the Thinkolator, but while it’s chugging along let me grab a couple other little snippets from the ad that give us some idea of what these “adjustments” are to accounting, and what Litman thinks they can do for you.
“We ran a forensic analysis of TransDigm’s financial statements… And found a huge discrepancy….
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“It turns out the Return on Assets was actually 67%… over 7 TIMES HIGHER THAN the number reported to the public!
“It was the result of $1.8 billion in “intangible assets” being placed in the wrong category of the balance sheet… which made the company look a lot less efficient than it truly was.”
That improvement, going from the graphics they show in the ad, was mostly just from adjusting out the goodwill and intangibles, but also some other much smaller categories like capitalized R&D and accounts payable. The reasoning goes, as I undertsand it, that if you more rationally describe the the asset base (making it smaller by adjusting that stuff away), then the same level of income looks like a higher return on assets… which means the company is making more money from its physical assets, which means its more efficient and perhaps should be more valuable.
From the ad:
“If you know a company’s Return on Assets is much higher than what they’re reporting in their quarterly statements, then sooner or later, their actual profits are likely to be much higher than what Wall Street expects.
“And when that happens, the results will surprise the public and cause a huge ‘correction’ higher in the stock.”
And a bit more from Litman on what his firm does…
“Each quarter, they report what they believe to be an accurate record of their earnings, based on Generally Accepted Accounting Principles (GAAP).
“But what I’ve discovered in my career as a Certified Public Accountant at Credit Suisse, Deloitte, PriceWaterhouseCoopers, and as a member of the Association of Certified Fraud Examiners, is that GAAP is full of distortions…
“As renowned investor Marty Whitman once said, ‘GAAP is not truth or reality.’
“Even the FASB committee members involved in rule creation for GAAP back in 1987 publicly admitted that the way financial statements are currently organized is ‘internally inconsistent’… ‘misleading’… and ‘confusing.’
“Altogether, there are more than 130 inconsistencies within GAAP that cause earnings to be distorted each quarter.
“But over the past 25 years, we’ve developed a form of forensic accounting that allows you to break apart any financial statement… and see the true earnings number of almost any stock, weeks or even months BEFORE the mass public has any idea.”
He also, by the way, uses these accounting adjustments to make some macro predictions… he says that current earn