"The more hidden the venom, the more dangerous it is."
-Marguerite De Valois
What Lies Beneath
Our EQ Review process identifies some companies with significant problems which may warrant further investigation of the fundamentals and the possible publication of a sell recommendation. These sell recommendations will display some or all of the following characteristics:
Multiple earnings quality problems that are overstating current growth and masking secular issues in the company’s end markets or business model
Material hidden liabilities and contingencies that are underappreciated by Wall Street
“Growth through acquisition” stories where weak or negative core growth is being obscured by constant acquisitions which produce poor returns and rising debt levels
Unrealistic non-GAAP disclosures where adjusted results paint an unrealistic picture of reality by dismissing ongoing operational expenses such as stock compensation, amortization of intangible assets, or ongoing restructuring charges that likely include expenses that should be viewed as operating in nature
Dividends in danger from deteriorating growth, rising payout ratios, or low-quality cash flows obscured by cuts to capital spending or working capital games
Dangerously high debt levels resulting from inadequate cash flow, roll-up strategies, and/or excessive buybacks
Timing for several of these catalysts can be identified and laid out