Do You Have Hidden "Time Bombs" Lurking In Your Investment Portfolio?
If you don’t know the answer to that question, it could cost you a fortune. Have you been caught holding the bag after a stock you owned tanked due to a big earnings miss?
Do you have a consistent approach to analyzing the quality of earnings that are reported by public companies?
Do you think you can benefit from a professional grade tool to help you make better investment decisions and rely less on the sharks and the "herd mentality" on Wall Street?
The Forensic Accounting Stock Tracker (FAST™) may be the tool you need to help you navigate the increasingly challenging stock market. Think of it as performing CSI for your stock portfolio.
Would you mind a 900% return on your money since 2000? FAST™ can help separate winners and losers by using techniques to catch crafty management teams with their hands in the cookie jar!
If you’re like most investors, you have had your share of investment clunkers and time bombs! Perhaps you got a hot "tip" from a friend, or you decided to take a chance on a certain Wall Street "high flyer" while the "warning" bells were going off in your head like a scene from a sci-fi movie. And then the inevitable happened, and you lost your shirt! In fact, anyone who says they haven’t is simply not telling you the truth. But over the past two decades I have developed a consistent approach for spotting companies on my radar screen with high quality of earnings while avoiding those that might torpedo a portfolio due to aggressive accounting or outright fraud.
So, who am I and why am I here? My name is John Del Vecchio and I am a forensic accountant and portfolio manager. Think of me as a stock detective that loves to catch management teams of public companies with their hand in the cookie jar.
I started my career on Wall Street in the late 1990’s during the Internet Bubble. I was the first intern for James P. O’Shaughnessy, author of the investment classic What Works on Wall Street. I helped test strategies back to the 1950’s and developed an appreciation for a consistent time-tested approach to investing.
While on Wall Street, I became deeply concerned that the Internet Bubble would collapse and trillions of dollars would be lost. This opinion was further developed after a stint at The Motley Fool, a leading personal finance and investing website.
I saw an opportunity to hone my skills and landed a job with Dr. Howard Schilit, a forensic accountant and CEO of one of the most successful independent Wall Street firms ever. Dr. Schilit also wrote the highly acclaimed Financial Shenanigans.
As the Internet stocks teetered on the brink I started my first hedge fund to capitalize on their demise. After that trade worked wonderfully well, I went to work for famed short seller David W. Tice. There I further enhanced my approach to separating the wheat from the chaff.
Then in 2008 I set up shop to capitalize on the looming financial crisis now universally regarded as "The Great Recession." Later on, I became an entrepreneur and innovator in the Exchange Traded Fund market, launching a bear market ETF as well as another ETF that garnered a 5-Star Morningstar rating in 2016.
When I wasn’t scouring balance sheets and other financial statements, I was writing What’s Behind the Numbers? A Guide to Exposing Financial Chicanery and Avoiding Huge Losses in Your Portfolio, a best seller for McGraw-Hill and the Stock Trader’s Almanac’s best book of 2013.
A couple of years ago I was approached by two Wall Street firms to produce a commercial version of the FAST™ product for hedge funds and other institutional investors. The commercial version is in use and is still available for professional clients. However, I have scaled back this version for individual investors while keeping the most important facets to provide exceptional value but on a smaller scale.
Today I am making it widely available to anyone that wants a tool to help improve their investment performance.
So, why would you even need FAST™?
Very Few Stocks Account for the Market’s Gains
Many investors I meet think that because the stock market goes up over time that investing in individual companies is a cake walk on the path to riches. However, studies show that very few stocks account for the bulk of the market’s gains.
In a capitalistic system, this makes sense. For every Wal-Mart, there are dozens of regional retailers that no longer exist due to lack of scale, distribution, technology, or just plain poor management. In the 1970’s Eastman Kodak and Polaroid reigned supreme, only to be bankrupt years later. The “horseman” of the Internet bubble such as Microsoft, Cisco, Dell, and Intel have lagged sharply since their peak. Today, Apple and Tesla are all the rage. But, where will they be in 10 years?
The chart below illustrates a study by Blackstar Funds. From 1983-2007, the Russell 3000 Index was up nearly 900%. Yet, 64% of the stocks underperformed. Nearly 40% were down in absolute terms while 19% declined in value by 75% or more. Most strikingly, just 25% of the stocks accounted for all of the market’s gains.
A systematic and tested approach can help tilt the odds in your favor. Merely picking today’s big winners can often lead to holding tomorrow’s big losers.
Wall Street’s Dirty Little Secret
Wall Street is out to make money. They’re not necessarily out to make you money. In recent times, more and more companies have resorted to accounting gimmicks, often called “financial engineering”, to goose their performance numbers and pull the wool over investors’ eyes (that’s you).
Take a look at this chart. Generally Accepted Accounting Principles (GAAP) are being distorted by many companies' own measures of profits (called pro forma) on an increasing basis.
Without the boost from making up their own numbers, profits would be 25% lower! The use of these metrics is the highest since 2008, the last time the stock market imploded!
Meanwhile, as more companies are resorting to accounting tricks they’re beating earnings at a higher rate.
Why would they do this? Well, usually CEOs and other top executives have much of their income potential tied into stock price performance. Their reign at the top is often short and Wall Street has a very unforgiving short-term timeframe within which CEO’s must deliver strong performance. Otherwise, the stock could tumble and with it millions of dollars in lost compensation.
So, they resort to tricks to overcome short-term challenges and put "lipstick on a pig". But, in the end, for the most aggressive companies, this is rarely ever enough. It’s a horror film. As we know, those usually end badly for the victims but more often than not the monster lives on to wreak havoc again and again.
So, it does for the stock price too.
Here’s the thing, those earnings are not sustainable!
What are some of the common adjustments companies make?
But, these adjustments can be much worse and FAST™ can help expose the biggest offenders while also rewarding management teams coloring within the lines and acting in the best interests of shareholders.
FAST™ - A Different Way to Invest
While many investors rely on common metrics like Price / Earnings ratios, they assume that the financials presented by companies are a fact and are to be accepted as gospel. On the other hand, we believe every company is guilty until proven innocent. This is not a court of law. It’s your money.
We’ve developed our own well-tested methodology behind the Forensic Accounting Stock Tracker (FAST™) model. We pick apart all of a company’s financial statements top to bottom and determine an earnings quality (EQ) score.
The EQ scores are derived from the quality and sustainability of cash flows, the propensity for management to have overstated revenue, or understated expenses as well as a host of “shenanigans” management may utilize to overstate reported profits on a sustainable basis. We’ll refer to these shenanigans and accounting tricks as “red flags.” These red flags are categorized by where they reside on the income statement and the degree to which they are likely to impact reported results.
The EQ score results are tabulated relative to a company’s own history as well as every other stock in the universe. The stocks are scored A, B, C, D, and F for each factor much like you would receive on a report card in high school.
“We cut through all the noise to figure out what companies are really earning on a sustainable basis. Never take management’s word for it! That’s the FAST™ advantage” - John Del Vecchio
FAST™ focuses on six categories – Multifactors -- of investment merit
Revenue Recognition -- These tests determine the likelihood of whether management has acted aggressively in recognizing revenue. Why is this important? Well, most people think revenue cannot be manipulated and only earnings are subject to such shenanigans.
But, the truth is there are many ways to manipulate revenue. As the saying goes, crap flows downhill so if management has played games with the company’s revenues, the entire financial model is suspect.
Cash Flow Quality -- Cash is king! Earnings are the first line on a cash flow statement. If earnings are bogus, then cash flow quality could be poor as well.
Earnings Quality -- All those line items on the income statement are like levers management can pull to generate whatever earnings they want. Pull the lever and just like a slot machine they can hit the jackpot. Our metrics are designed to spot these tricks of the trade. We also look at ways management is using the balance sheet to prop up reported earnings.
Expectations -- Many people look at the trend in earnings estimates. Wall Street has a herd mentality and so analysts tend to raise or lower estimates in tandem. We anticipate those estimate changes by exploiting the psychology of Wall Street analysts and combining it with earnings quality and investor reaction to earnings reports.
Valuation -- Since the beginning of time, buying an item worth $1.00 for $0.50 has been a decent bet, and the reverse is also true. Valuation matters. Reasonable valuations combined with quality earnings is a winning strategy over time.
Shareholder Yield -- Focus on companies that pay you first, and you’ll be handsomely rewarded over time. History shows that companies that initiate and grow dividends outperform all other types of stocks based on dividend policy. But, not all dividends and buybacks are the same. The quality of the financials is a key determinant in whether shareholder yield is investor friendly or just smoke and mirrors.
FAST™ has been used in real-time for nearly a decade. But, the underlying concepts go back nearly half a century. Some factors such as the Price / Earnings Quality ratio are unique to FAST™ and custom formulas that I developed based on my years of experience analyzing financial statements.
In testing since 2000, the highest quality companies have generated a total return of 945% compared with a loss for the lowest ranked stocks.
What you get with FAST™
Over the years, I have honed the FAST™ software. Until now, it has only been available to me and a few select investment firms. FAST™ is an easy-to-use application that is based on the Microsoft Excel® platform. But don't worry - even if you're not an avid Excel user, you'll be able to quickly begin using the application with success. Besides offering users the ability to quickly find and evaluate any of the stocks in the FAST™ model, we have included 13 months of historical data (including aggregate rank, price, market capitalization, multifactor rankings, etc.) for more detailed analysis. We use 13 months of data so you can review year-over-year (YoY) performance results. Worksheets are included that provide a monthly snapshot of individual stock and sector performance, and how individual stocks have moved up or down in terms of overall ranking, as well as their ranking within each of six "Multifactors" discussed above - Revenue, Cash Flow, Earnings Quality, Expectations, Valuation, and Shareholder Yield.
To help ensure even greater benefit and value to users, we have built into the model a tool that lets you retrieve historical adjusted prices from the Internet for a single stock or a group of stocks of your choice. You'll be able to easily customize a nearly endless variety of portfolios that will help you achieve your unique investment objectives
Here is a screenshot of a portion of the main FAST™ worksheet from January 2016.
What FAST™ is Not
FAST™ is not a get rich quick scheme. A lot of thought, effort, and skill went into developing it. Then, we spent countless hours back testing the model to help ensure its validity. There are no get rich quick schemes. If you see one offering outrageous returns designed to appeal to greed, please run (don’t walk) the other way! To be sure, we can’t even guarantee that you will make money using FAST™. We can assure you, however, that the independent test results presented here are valid and that the model, if used judiciously, should help you achieve your investment goals.
How to Use FAST™
There are several ways to use FAST™ in your investing process. Among them:
Individual stock selection -- FAST™ can help you analyze individual stocks and narrow your investment opportunities down to the highest earnings quality equities.
Options Trades – FAST™ is built around identifying companies with the highest opportunities or risks to generate earnings results that exceed or fall short of investor expectations. Stocks tend to have more volatility around earnings releases. Using options on high / low ranked FAST stocks may improve returns or hedging opportunities by betting on stocks that may exceed or fall short of analysts’ and investors’ expectations.
Building an Entire Portfolio – While FAST™ ranks stocks in order of earnings quality, there may ultimately be little difference between the #1 and #22 ranked stock, for example. Buying an entire basket of the top 25 or 50 stocks may provide a diversified portfolio that carry similar underlying characteristics, namely strong earnings quality, reasonable valuations, and expectations that could lead to upward revisions in the coming quarters.
As an insurance policy on your portfolio holdings – FAST™ can be used to analyze underlying stocks held in ETFs, mutual funds, hedge funds, or your broker’s recommendations. Is your ETF holding a bunch of companies that are using aggressive accounting techniques? There’s only one way to find out.
Sector analysis – You can gauge the performance of various sectors over time. Perhaps you want to invest in a defensive sector like Health Care, or perhaps you think the Energy Sector should do well based on world events? FAST™ will help you do all this, and more.
This all sounds great, how do I get Access to FAST™?
Please email me directly at email@example.com, and I will be happy to provide you with a historical file along with subscription pricing options. FAST™ is priced for the individual investor. However, institutional firms interested in a subscription or in using FAST™ for custom indexes should also inquire.
Access to FAST™ is strictly limited. My focus is not to sell hamburgers to the mass market. Rather, FAST™ is a premium filet mignon designed for the most discerning investors.
In addition, while I do not provide individualized investment advice, I strongly believe in personable service. So, I deal directly with all subscribers to the software.
So, what are you waiting for? FAST™ may help provide that last bit of edge you need in your investment process.
I look forward to hearing from you!
- John Del Vecchio
The FAST™ Model (the “Model”) which, along with its related publications (collectively, the "Report") is edited and published by Parabolix Research, Inc., and offered to the general public on a subscription basis.
While the FAST Model allows users great latitude in conducting research and historical analysis of individual stocks, ETFs, indices, or groups of securities, it is general in nature and does not provide individualized advice or recommendations for any specific subscriber or portfolio.
The Editor hereby discloses that the Editor does not directly own any securities published in the Model.
Investing involves substantial risk. Neither the Editor, nor the publisher, nor any of their respective affiliates make any guarantee or other promise as to any results that may be obtained from using any of the Report materials, including the Model. While past performance will be available and may be analyzed by using the Model or Report materials, past performance should not be considered indicative of future performance. No subscriber should make any investment decision without first consulting his or her own personal financial advisor and conducting his or her own research and due diligence, including carefully reviewing the prospectus and other public filings of the issuer. To the maximum extent permitted by law, the Editor, the publisher and their respective affiliates disclaim any and all liability in the event any information, commentary, analysis, opinions, advice and/or recommendations in the Report prove to be inaccurate, incomplete or unreliable, or result in any investment or other losses.
The Report's commentary and analysis are subject to change at any time without notice. The Model does not provide advice or recommendations.
The information provided in the Report, including the Model, is obtained from sources which the Editor believes to be reliable. This information used in the Model is gathered from publicly available sources. However, the Editor has not independently verified or otherwise investigated all such information. Neither the Editor, nor the publisher, nor any of their respective affiliates guarantees the accuracy or completeness of any such information.
The Report is not a solicitation or offer to buy or sell any securities.
Neither the Editor, nor the publisher, nor any of their respective affiliates is responsible for any errors or omissions in any Report, including the Model.
Additional Risk Disclosure Statement for System Traders:
Commission Rule 4.41(b)(1)(I) hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not actually been executed, the results may have under- or over-compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses. There have been no promises, guarantees or warranties suggesting that any trading will result in a profit or will not result in a loss.
Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. In fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program.
One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk in actual trading. For example, the ability to withstand losses or adhere to a particular trading program in spite of trading losses are material points which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully account for in the preparation of hypothetical performance results and all of which can adversely affect actual trading results.
©2017 Parabolix Research, Inc. All rights reserved. Forensic Accounting Stock Tracker (FAST)™ is a trademark of Parabolix Research, Inc. “CSI For Your Stock Portfolio” is a service mark of Parabolix Research, Inc. All other trademarks are the property of their respective companies. No copies of this report or the information herein may be made, and use is strictly limited to the Customer purchasing this report pursuant to this End User License Agreement. Some of the information in this Model or in Report materials is based on publicly filed reports with the Securities Exchange Commission and made available on its EDGAR database, and Parabolix Research does not guarantee the accuracy or completeness of the EDGAR Data set forth in any Report materials or analysis and conclusions based thereon. Opinions reflect judgment at the time and are subject to change.