Editor’s note: Nothing makes a stock move faster than a quarterly earnings report…
If a company beats Wall Street’s expectations, its stock goes up. And if it doesn’t, the stock goes down… sometimes significantly in a single trading day.
But as our good friend Professor Joel Litman has noted over the past few weeks, “as reported” numbers like this often contain flaws that can mislead investors…
Тoday we’re sharing two recent examples uncovered by Joel’s remarkable system. As you’ll see, his team’s efforts to level the playing field for everyday investors can lead to opportunities you might otherwise ignore…
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When Bill Bowerman and Phil Knight founded Blue Ribbon Sports in 1964, they had no idea what they were about to start…
Now known as Nike (NKE), the company started the sportswear revolution.
Before Nike started making athletic shoes, there was very little progress in the market.
It’s hard to picture a world without innovative sportswear. Imagine LeBron James running up and down a basketball court in a pair of Converse All Stars.
Nike has managed to stay ahead of the curve with its shoes. In the 1970s, it was the Cortez. The ’80s brought the Air Force 1 and the Air Jordan. To this day, Nike has continued to release signature shoe after signature shoe.
And the sportswear revolution isn’t limited to shoes… Every time Michael Jordan would show up in a new warmup outfit, fans would line up to buy the full look.
Athletic clothes are becoming more popular – and acceptable to wear – off the field. In 2016, the term “athleisure” finally joined the dictionary. The sportswear revolution is here to stay.
I try to live by the “health is wealth” doctrine. And I believe you can’t have a strong mind without a healthy body. Despite a sometimes hectic travel schedule, I try to get to the gym whenever time permits, at whatever hotel fitness center might be around.
Visiting so many different gyms, I do notice some trends in sportswear. Several watershed moments leading up to the current athleisure trend come to mind for me…
- The first pair of Nike running shoes.
- The popularity of Adidas’ three stripes.
- The comfort and practicality of compression shorts.
In the mid-1990s, a former college football player named Kevin Plank took the moisture wicking material from his compression shorts and fashioned it into an undershirt for football players. The style was a hit… and apparel maker Under Armour (UAA) was born.
Under Armour gained quick popularity with football players… But Nike and Adidas were close behind.
Today, all three companies work in similar ways. They make a full line of sportswear, shoes, and gear for just about every sport. They endorse the best athletes in the world. Adidas backs soccer greats Lionel Messi and David Beckham. Nike sponsors LeBron James and soccer star Cristiano Ronaldo. Under Armour signed NFL quarterback Tom Brady and basketball player Stephen Curry.
However, having the best athletes doesn’t mean you have the best company…
Under Armour announced its second-quarter results in July, and the numbers did not look good. The company missed on its earnings and revenue targets, and management guided expectations down for the rest of the year.
This news added to concerns about the company’s ability to execute. Under Armour has historically lagged its competitors in efficiency, advertising, and innovation.
The stock fell 15% in the hours following the announcement. Worse yet, shares are down roughly 30% since their July 29 peak.
But things are not as bad as they seem. Take a look…
Investors fear Under Armour is failing. When looking at the company’s recent return on assets (“ROA”), it seems like they’re right… Under Armour’s ROA fell below its cost of capital in 2017, and it has remained at 3% since.
Luckily for Under Armour, this does not tell the right story.
We specialize in “Uniform Accounting” – a more reliable way of looking at companies than the generally accepted accounting principles (“GAAP”) and International Financial Reporting Standards (“IFRS”) accounting policies.
When we apply our Uniform Accounting metrics, the distortions from as-reported accounting statements are removed – including lease capitalization versus expensing, treatment of goodwill, and excess cash – and we can see that there is hope for Under Armour…
The two panels in the above chart explain the company’s historical corporate performance levels in terms of ROA and asset growth (dark blue bars) versus what sell-side analysts think the company is going to do in the next two years (light blue bars) and what the market is pricing in at current valuations (white bars).
Traditional accounting metrics (orange bars) can distort how investors view a stock. Without understanding a company’s true profitability, it’s impossible to properly analyze its stock.
Looking at the most recent years, Under Armour is more profitable than investors think… Its ROA actually bottomed out at 6% in 2017, improved to 8% last year, and is forecast to be around 7% this year.
Investors were concerned Under Armour wouldn’t be able to improve ROA above its cost of capital. But as it turns out, the company’s ROA never fell below its cost of capital.
The market punished Under Armour without good reason. Investors thought their fears were coming true, but it was just unclear accounting.
The market overreacted.
Investors missed out on signals that the company is already rebounding, and its performance was never as bad as expected to begin with.
Standard accounting metrics once again misled investors and created too much noise in the market.
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Wall Street Is Missing Out on This ‘Streaming Wars’ Winner
There are as many streaming services today as quality TV shows…
Between names like Apple TV+, Disney+, HBO Max, AT&T TV Now, NBCUniversal, and Discovery, you may soon be paying more than $50 a month just on streaming services.
But there’s an equally difficult decision you need to make… Before you can catch up on the latest episodes of Planet Earth or The Simpsons, you need to pick a streaming device.
Obviously, you can watch most of these on your phone or computer with no problem. But when it comes to watching streaming services on your TV, your set-top box won’t cut it anymore.
The options are nearly endless. Besides pricey smart TVs, you can pick from the big-name Amazon Fire Stick, Google Chromecast, or Apple TV, among others.
But when you need something in the middle, the best option is often from Roku (ROKU).
As I’ll show you, this streaming-device maker is a much stronger company than Wall Street realizes.
And when the “streaming wars” recently took a dramatic new turn, the bad press buried this incredible opportunity even deeper…
Roku regularly dominates the “best of” lists from the folks at tech-focused websites like Wired, Wirecutter, and CNET. It offers the Streaming Stick+ that plugs into your TV, a standalone hockey-puck size Ultra model, and even its own smart-TV software.
But when viewed through a traditional accounting lens, Roku looks like a terrible company. Its as-reported ROA is negative.
Of course, as I said earlier, my team and I specialize in Uniform Accounting – a more reliable way of looking at companies than the accepted accounting policies.
If we look at Roku’s cleaned-up numbers, we can see it is a profitable business…
When we apply our Uniform Accounting metrics, we remove the distortions from as-reported accounting statements – and we can immediately see that Roku has a much stronger ROA than the market realizes.
And the fact is, this is a much more valuable number for investors… If you would have realized this discrepancy in December 2018 and invested in ROKU, you’d be up almost 300% today.
That’s the power of Uniform Accounting.
Roku’s triple-digit rebound from its December lows makes no sense for a business that is supposedly losing money year after year. It only makes sense when you know the company’s real numbers.
Not only is Roku profitable today, but it has actually been profitable for as long as it has been a public company…
The panel above explains Roku’s historical corporate performance in terms of ROA (dark blue bars). Broadly speaking, the company has seen ROA grow from 4% in 2015 up to peak 20% levels in 2018.
Roku makes great products in a successful niche. And it’s likely to win even as other companies like Amazon (AMZN), Disney (DIS), HBO, and Apple (AAPL) battle each other in what the media is calling the “streaming wars.”
Now, if you’ve been paying attention to the markets, you might be wondering what’s happened recently. Despite its overall spectacular gains this year, Roku’s stock has gotten crushed in recent weeks.
That’s because its competitors know how much they have to lose… And several of them announced new product launches that caught the market’s attention.
These included cable giant Comcast (CMCSA), the loser of the streaming wars. Last month, it announced it was offering its Xfinity Flex streaming box to Internet-only subscribers for free, after charging $5 a month previously.
Social media giant Facebook (FB) also announced its second attempt to enter the streaming wars. It released a $149 “Portal TV” streaming device that will ship later this year.
Of course, Facebook released a video and chat “smart speaker” last year… to crickets. And Comcast’s free offering is one of dozens of streaming boxes available.
Competition from giant media companies is nothing new for Roku. It has been competing against pricey smart TVs, the Amazon Fire TV Stick, Google’s Chromecast, Apple TV, and others… for years.
And it has still been churning out profits… Yet most investors don’t see this. They can’t – because they’ve been misled by bad accounting policies.
I look at Wall Street’s reaction as an opportunity…
Roku has been profitable for as long as it has been a public company. An extra competitor in the streaming wars won’t change that.
The recent price drop only sweetens the deal for investors. Take this as an opportunity in a company that Wall Street doesn’t understand.
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If you’re willing to exploit it, you could make six times your money, according to the Boston finance professor who just discovered it. The last time he found a situation like this, you could have made 1,100%.
Editor’s note: Joel recently went on camera to demonstrate his powerful “Investment Truth Detector.” Together, he and Porter showed thousands of viewers how to pinpoint which stocks could soon double your money or more. We’ve made a replay available for the next few days. But don’t delay… It goes offline Monday at midnight. Learn more here.