What you will see below:
A sample of one of our short models.
This model seeks short-sale candidates among companies that use aggressive accounting and/or exhibit deteriorating quality of earnings.
The model looks at the magnitude and presence of the following types of problems: CFFO falling short of Net Income, slowing Inventory, receivables or other current assets, rising other accruals, large adjustments to GAAP earnings, high levels of non-operating income or equity income, high levels of equity dilution, pension shortfalls and other similar issues. It also contains a qualitative section that searches for specific word combination regarding accounting, governance, controls and other special issues.
Accounting shorts tend to be good shorts if the accounting issues mask fundamental business problems. They are typically highly idiosyncratic shorts and require thoughtful analyses of upcoming catalysts. When the company’s issues become well-known, there is often multiple compression as well as a rerating based on the difference between the reported results and economic reality.
These shorts can have high or low betas, valuations based on artificial earnings and exhibit good short responses to subsequently disappointing earnings.
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