For February 21, 2018, our forensic accounting red flag is from an amusement park operator with significant hidden non-operating income.
Check out our H2 hedge fund letters here.
We pulled this highlight from yesterday’s research of 72 10-K filings, from which our Robo-Analyst technology collected 11,789 data points. Our analyst team used this data to make 1,985 forensic accounting adjustments with a dollar value of $1.7 trillion. The adjustments were applied as follows:
ADW Capital’s 2020 letter: Long CDON, the future Amazon of the Nordics
ADW Capital Partners was up 119.2% for 2020, compared to a 13.77% gain for the S&P 500, an 11.17% increase for the Russell 2000, and an 8.62% return for the Russell 2000 Value Index. The fund reports an annualized return of 24.63% since its inception in 2005. Q4 2020 hedge fund letters, conferences and more Read More
- 878 income statement adjustments with a total value of $133 billion
- 788 balance sheet adjustments with a total value of $745 billion
- 319 valuation adjustments with a total value of $842 billion
Figure 1: Filing Season Diligence for Wednesday, February 21st
Sources: New Constructs, LLC and company filings.
We believe this research is necessary to fulfill the Fiduciary Duty of Care. Ernst & Young’s recent white paper, “Getting ROIC Right”, demonstrates how these adjustments contribute to meaningfully superior models and metrics.
Today’s Forensic Accounting Needle in a Haystack Is for Consumer Cyclicals Investors
Analyst Pete Apockotos found an unusual item yesterday in Six Flags’ (SIX) 10-K.
On page 80, SIX disclosed a $72.9 million reversal of stock-compensation expense. The compensation committee determined that they were unlikely to hit the $600 million modified EBITDA target that would trigger executive stock grants in 2017, so they took a big gain to offset previous recorded stock-option expense. Essentially, the company got a $72.9 million (27% of net income) boost to reported net income for failing to hit its performance target.
This non-operating income misleadingly boosted SIX’s reported EPS by 147% in 2017. After this adjustment, our model shows that after-tax operating profit (NOPAT) grew by a much more modest 22%. Failure to adjust for this non-operating item creates the illusion that SIX is growing profits much faster than it truly is.
This article originally published on February 22, 2018.
Disclosure: David Trainer, Pete Apockotos, and Sam McBride receive no compensation to write about any specific stock, sector, style, or theme.
Article by Sam McBride, New Constructs