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 earnings and returns are understated compared to “real” earnings power….
“…. the REAL, TRUE data shows that this bull market will continue through the fall of 2020. With a final melt up phase, when certain stocks will skyrocket.
“Frankly, being able to see the ‘big picture’ of the market might be the greatest benefit of all of using forensic analysis.
“It’s how I warned about a market decline back in June 2008 at the New York City CFA meeting, just before the worst crash in 30 years.
“And why we said ‘Buy Stocks’ back in 2013… when Business Insider said, “Yes, Stocks Could Drop 50%.”
“Why we said ‘Buy Stocks’ again in 2017… when Fortune magazine said, ‘Get Ready for a Stock Market Drop.'”
I have no idea whether that’s a fair assessment of Valens’ big picture “calls” about the direction of the market or not, certainly anyone with a track record can cherry pick the record to find their best moments… so I’m sure those statements are true, but wouldn’t be surprised if they’re an incomplete reckoning of Valens’ macro predictions.
And sure, I like the idea of a research service that provides “uniform accounting” to adjust away and standardize stuff like R&D spending, goodwill, inventory recognition policies, and all the other stuff that’s always at least a little different from company to company, though I don’t know whether I’d want to plunk down $2,500 (no refunds, recall) just to get some handpicked stock ideas based on interpretations of that data, and I definitely can’t justify Valens Research’s $10,000 a year as an individual investor. But Litman is a pretty compelling speaker and writer, and I’ll keep paying attention… it will be interesting to see if this fairly wonky accounting stuff, powered up by the Stansberry marketing machine, captures the interest of subscribers and investors.
But anyway, the Thinkolator should be done with its cogitationizing by now, right? Indeed… what stocks have been near $38 in price over the past month, have a Return on Assets (ROA) of about 10.4% either last year or over the last four quarters, and have some connection to the state of Iowa?
There are actually quite a few contenders, if you’re curious, though I didn’t check their balance sheets to see if they’re obscuring something… here’s a quick rundown of a few of the finalists, just to prolong the delicious suspense…
Foot Locker (FL) — was near $38, Millennials do love their sneakers… but it’s not really in Iowa.
Evertec (EVTC) — close-ish to high $30s, payment processing in Latin America… no Iowa connection.
Herbalife (HLF) — not Iowa.
Johnson Outdoor (JOUT) — getting closer (Wisconsin), but still not Iowa — watercraft, mostly. Super seasonal.
Raven Industries (RAVN) — also close to Iowa, in South Dakota, but not close enough — they are an applied technology company doing a lot of unrelated stuff, including engineered films, they started as a maker of high-altitude research balloons for the space program. Can’t imagine Millennials are super into big weather balloons.
Winpak (WIPKF) is a midwestern company, too, but they’re the Canadian midwest, in Manitoba. They make packaging materials and machines, primarily for perishable foods. Stable cash growth, so they must be doing something right, but it doesn’t make them Iowan.
eBay (EBAY) is not all that small, and this is teased as a small cap… plus, California is not Iowa.
Gorman-Rupp (GRC) is in pumps, which doesn’t sound like it could connect to any kind of social movement among millennials… and, plus, Ohio isn’t Iowa.
No, if you want a company that is based in Iowa, with a stock price near $38, and with a return on assets near 10.4%, with some sort of argument that a social trend among millennials is boosting their fortunes, you’re left with one choice: RV maker Winnebago Industries (WGO)
Winnebago is probably the biggest brand in recreational vehicles, though it’s the second or third largest company in the space… so it is not exactly a secret, of course, and they’ve been doing pretty well recently — they just posted their best quarter in many years when it comes to net income or EBITDA, though revenue has been softening a little.
Winnebago is much smaller than industry leader Thor Industries (THO), but they’ve been growing recently, in part, by buying smaller brands, including the watercraft maker Chris-Craft and RV companies Newmar and Grand Design, which has upped the “goodwill” line on their balance sheet a bit, so maybe that’s one of the accounting anomalies Litman is looking at, I don’t know.
The stock had a nice pop this week, perhaps in small part because of Litman’s attention but mostly, I imagine, because Thor Industries came out with a very strong quarter and said some optimistic things about 2020 (THO stock popped as much as 20% on the news, though has now given half of that back). Here’s a brief excerpt from Briefing.com’s note on the Thor quarter:
“So why is the stock higher on what looks like a mixed quarter? We think it’s higher because investors are focusing more on positive comments about FY20. Thor does not provide specific numerical guidance. However, CEO Bob Martin says he “believe[s] we are nearing the conclusion of the North American independent dealer inventory rationalization process, resulting in normalized dealer inventory levels by the end of this calendar year.” This is a very positive statement as a big problem for the industry has been a glut of inventory. The RV makers failed to adjust to declining demand and now there are way too many RVs on dealer lots. This has been a cloud over the stock for some time, so investors are very happy to hear that this problem may be going away.”
I haven’t looked through the filings or notes to see if maybe there are other things Winnebago might be doing with their accounting policies that obscure the value of the company, I have no idea how they account for inventory or whether they’re capitalizing R&D costs or anything else. If you do get rid of that “goodwill and intangibles” line, though, then yes, the return on assets would be much higher — for the trailing twelve months the net income was $110 million, and taking just the goodwill and intangibles out of the total assets would roughy cut the asset level in half, meaning that ROA jumps immediately from 10% to about 22%. Presumably he’s making other adjustments beyond that to get to his 30%+ ROA, but I don’t know specifically what adjustments.
So you’ll have to do your own forensic accounting on this one, I’m afraid, I’m no expert on Uniform Accounting Standards or on Litman’s work, but it’s interesting stuff… and Winnebago is a strong brand, trading at a very reasonable valuation even using conventional GAAP accounting (it’s at about 11X 2019 earnings, with revenue growing very slowly), with some opportunity that might be under-appreciated as they skip us Gen-X folks (who are used to being ignored, frankly) and appeal to the much larger and experience-oriented Millennial generation. And yes, Millennials are the big target that Winnebago and Thor and lots of smaller upstarts are fighting to appeal to, and they do a lot more camping than my generation (and love different kinds of RVs, like the smaller adventure-minded Winnebago Revel).
The downside? Well, I guess it’s that people think that we’re heading into a recession… RV sales had a weak year compared to the recent past… and auto sales are falling… which means that we’re worried about whether or not people will keep buying lots of RVs, particularly those monstrous Class A RVs that powered the last decade for Winnebago (Thor is much stronger in the “towables” segment, which is a lot larger than the motorized RV segment). Winnebago does have some debt, though with the return on assets at 10% and return on equity at almost 20% it doesn’t seem likely that they’ll have any trouble paying their debt service unless sales collapse dramatically, and the shares trade at only 2X book value.
If you compare Winnebago to the other stocks that are in the RV sector or affiilated with it, the indications are that similar trends impact all of the companies… which isn’t a surprise… but also that Winnebago has probably been the strongest performer in recent years — this is the performance of Winnebago compared to the much larger Thor Industries (THO), which is the other publicly-traded RV “pure play” stock (and owns Airstream, among other major brands), and suppliers Patrick Industries (PATK), which sells RV interiors, and LCI Industries (LCII), which mostly sells RV chassis, and Camping World (CWH), which operates RV dealerships and camping superstores.
I kind of like this as a contrarian idea, at least, though I’m intrigued partly because of that (admittedly very small) semi-hidden asset in there of Chris-Craft, which has a strong history as an “authentic” outdoor brand, and I think a company like Winnebago might be able to build on that in a meaningful way over time. Sentiments have shifted wildly for Winnebago over the past few years, going from lows near $20 to highs of almost $60, and that’s been true of market leader Thor as well, with both of them peaking in December of 2017 as the industry was widely perceived as “flattening out” at that time when it comes to shipments and sales, after a very strong decade, and falling pretty dramatically from those levels (the third large player in the industry is Forest River, which is hidden inside Berkshire Hathaway so we know a lot less about their financials).
So there you have it, dear friends — looks like the first pick from the new Altimetry High Alpha service from Litman and Stansberry must be Winnebago… and with that, I’ll turn it back over to you to discuss it amongst yourselves. Think there’s a strong future for RVs? Like the prospects for Winnebago, arguably the strongest brand in the space? Think this valuation is reasonable, whether the return on assets number is really 10.4% or 30%? let us know with a comment below.
Disclosure: Of the companies mentioned above, I own shares in Berkshire Hathaway. I will not trade in any covered stock for at least three days, per Stock Gumshoe’s trading rules.