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How to recognize BS stock market financial claims

Posted by John T. Reed on

I recently was exposing you guys to some general financial analysis principles that I did not identify. I should identify them. I think I got some from the book Financial Shenanigans. And I certainly learned them at graduate business school.

The numbers giveth but the footnotes taketh away. The footnotes are more important to read than the other stuff in a financial report produced by the company.
• Line graphs of multiple corporate metrics should have roughly the same slope and direction. For example, Amazon’s sales, stock price, earnings, head count should all be moving roughly the same. When the stock price is soaring, but none of the other metrics are, there is probably something rotten in Denmark.
This also applies to the U.S. economy. GDP growth comes from two things and only two things: population growth and/or productivity growth. When Trump or any other politician says they are going to make you individually more prosperous through GDP growth and also going to reduce immigration, that necessarily means they are going to cause a huge jump in your personal productivity.
But Trump says little about productivity. He implies that keeping out immigrants lets you raise your pay by cutting down on competition for your job. That is abhorrent, and economic nonsense. To succeed, people and companies and nations must be competitive. You don’t become more competitive by banning competition.
Real growth in your personal productivity, a.k.a. your market value as an employee or sole proprietor, stems from increased training, experience, and cost-saving tools and equipment—making your products or delivering your services more efficiently.
So we have companies bragging about some metric, like top-line sales or stock price, when all their other metrics are looking quite different. We also have politicians claiming similarly that they will cause some metric like GDP to skyrocket while related metrics like population and productivity are flat or near flat. Such deviant metrics are red flags that should be at least scrutinized carefully, if not just laughed at.
Deviations from normal ratios also are red flags. PE ratios, for example, should generally cluster around the long-term average of 13. You want your stock price to skyrocket? No problem. Just make your earnings skyrocket. If your stock price skyrockets not because your earnings skyrocketed but rather because your PE ratio skyrocketed, that’s obvious bull. 
In apartment buildings, 55% of the gross rent is net operating income; 45% goes to operating expenses (all expenses other than mortgage payments). That ratio applies across all regions, eras, apartment buildings sizes and types. But you often see apartment buildings for sale where the agent and seller claim their apartment building has a 25% or 35% operating-expense ratio. It’s a lie. Again, such deviations require greater scrutiny of the reasons at least, and warrant that you fall down laughing in general.
“Hockey stick” predictions of revenue and/or earnings growth are extremely common. Actual “Hockey stick” shaped financial performance is extremely rare. The Amazon story about their current anemic profits and future pot of gold are nothing but the “long-known in corporate financial reports” hockey stick prediction. Global warming is a BS hockey stick temperature graph.
A corporate financial claim that deviates markedly from other metrics, other companies’ metrics, or industry ratio norms, must be plausibly explained. If not, laugh at the insult to your intelligence and walk away.

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