{"id":29730,"date":"2012-05-18T15:10:40","date_gmt":"2012-05-18T19:10:40","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/2012\/05\/money-losing-companies-that-beat-the-market-by-46-each-year\/"},"modified":"2012-05-18T15:10:40","modified_gmt":"2012-05-18T19:10:40","slug":"money-losing-companies-that-beat-the-market-by-46-each-year","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2012\/05\/18\/money-losing-companies-that-beat-the-market-by-46-each-year\/","title":{"rendered":"Money-Losing Companies That Beat the Market By 46% Each Year"},"content":{"rendered":"

Article by Investment U<\/a> <\/p>\n

\"Money-Losing<\/p>\n

Over the past 10 years, if you bought all of the stocks that lost money but had positive cash flow, you\u2019d beat the market by an average of 46% per year.<\/p>\n<\/div>\n

When I was young, stupid and chasing girls, good looks were the most important attribute a female could have as far as I was concerned.<\/p>\n

A disastrous relationship with an insane model changed my thinking pretty quickly. After splitting up with \u201cCrazy Christine,\u201d as my friends used to call her, I became much more interested in what was beneath the surface.<\/p>\n

The same can be said about my approach to stocks.<\/p>\n

Most investors look at earnings when evaluating a company. And that\u2019s a great place to start. Typically, a company that\u2019s consistently increasing its earnings has a healthy business, and the stock should emulate that success.<\/p>\n

But I like to dig deeper and really get to know the company. To do that, I look at cash flow.<\/p>\n

Cash flow is how much actual cash came into the company versus how much went out. At the end of the year (or quarter) if more cash came in than went out, the company is cash flow positive.<\/p>\n

Now, you may be asking, if the company is profitable, shouldn\u2019t it be cash flow positive?<\/p>\n

Not always.<\/h2>\n

Due to complex accounting rules, earnings can be doctored to tell pretty much any story an executive wants.<\/p>\n

Here\u2019s an example of how a company can be profitable, but not cash flow positive.<\/p>\n

In 2011, InterDigital<\/strong> (Nasdaq: IDCC) made $89 million in earnings. However, its cash flow from operations was negative $34 million. How is it possible the company was profitable, yet saw more money go out the door than came in?<\/p>\n

When we look at InterDigital\u2019s statement of cash flows, we see that the company recognized $235 million in deferred revenue, which is subtracted from cash flow. Here\u2019s why\u2026<\/p>\n

Deferred revenue is when a company gets money up front, but doesn\u2019t recognize the revenue right away. This is very common among software, technology and services companies. For example, a company will sell a software package that has a $1-million service agreement that\u2019s valid for four years. The company might get paid that $1 million up front, but will only recognize $250,000 per year for four years.<\/p>\n

On the cash flow statement, however, that money has to be accounted for, because cash flow represents how much money flowed into or out of the company.<\/p>\n

So in InterDigital\u2019s case, the negative $235 million means the company recognized the revenue in calculating net income; however, it doesn\u2019t represent any actual cash that flowed into the company in 2011. That money came into InterDigital in previous years, but is only now being recognized as revenue and contributing to earnings.<\/p>\n

To sum up, InterDigital made a profit in 2011 because it recognized revenue on cash that it received prior to 2011. But it didn\u2019t bring in more cash than it spent. Keep in mind, this is actually a conservative strategy, because if the company recognized all of the revenue at once, when it still owes a client four years of service, that could cause problems down the road if its obligations aren\u2019t met.<\/p>\n

And it goes both ways…<\/h2>\n

This earnings and cash flow discrepancy can work the other way, too, where a company is unprofitable. but takes in more cash than it spent.<\/p>\n

For example, in 2011 Zynga<\/strong> (Nasdaq: ZNGA) lost $404 million. But when we look at its statement of cash flow, we see that $600 million in expenses was stock-based compensation expense \u2013 which is a non-cash item. It still needs to be accounted for on to determine profitability, but it doesn\u2019t represent cash going out the door in the same way paying employees\u2019 salaries does. So that $600 million gets added back to cash flow. After a few other small adjustments, the company\u2019s cash flow from operations was $389 million.<\/p>\n

So even though it lost $404 million according to the income statement, the business actually generated $389 million in cash.<\/p>\n

I ran a screen to see which companies were unprofitable and cash flow positive and profitable but cash flow negative. Here are some of the largest in terms of market cap. Results are for the full year 2011.<\/p>\n\n\n\n\n\n\n\n\n
Unprofitable\/Cash Flow Positive\u00a0<\/strong><\/td>\nProfitable\/Cash Flow Negative<\/strong><\/td>\n<\/tr>\n
Anadarko Petroleum<\/strong>\u00a0(NYSE: APC)<\/td>\nArcher Daniels Mid<\/strong>\u00a0(NYSE: ADM)<\/td>\n<\/tr>\n
Level 3 Communications<\/strong>\u00a0(NYSE: LVLT)<\/td>\nCarMax<\/strong>\u00a0(NYSE: KMX)<\/td>\n<\/tr>\n
Nokia<\/strong>\u00a0(NYSE: NOK)<\/td>\nElan Corp.<\/strong>\u00a0(NYSE: ELN)<\/td>\n<\/tr>\n
Salesforce.com<\/strong>\u00a0(NYSE: CRM)<\/td>\nLennar Corp.<\/strong>\u00a0(NYSE: LEN)<\/td>\n<\/tr>\n
Transocean<\/strong>\u00a0(NYSE: RIG)<\/td>\nSpirit Aerosystems<\/strong>\u00a0(NYSE: SPR)<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

Knowing which companies are getting too much credit for their earnings, or too little for their cash flow, is a good starting point for your investment research<\/a>.<\/p>\n

In fact, over the past 10 years, if you bought all of the stocks that lost money but had positive cash flow, you\u2019d beat the market by an average of 46% per year.<\/p>\n

So whether you\u2019re checking out potential dates on Match.com or looking at the fundamentals of a stock, it pays to look beyond what you see on the surface and dig a little deeper. The rewards for doing so are significant.<\/p>\n

Fortunately, I realized that a long time ago. I\u2019ve been happily married to my wife, who was previously not my \u201ctype,\u201d for 16 years.<\/p>\n

Good Investing,<\/p>\n

Marc Lichtenfeld<\/p>\n

\n<\/a> <\/a> <\/a> <\/a> <\/a>\n<\/div>\n

<\/p>\n

Article by Investment U<\/a> <\/p>\n","protected":false},"excerpt":{"rendered":"

Article by Investment U Over the past 10 years, if you bought all of the stocks that lost money but had positive cash flow, you\u2019d beat the market by an average of 46% per year. When I was young, stupid and chasing girls, good looks were the most important attribute a female could have as … <\/p>\n

Continue reading “Money-Losing Companies That Beat the Market By 46% Each Year”<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-29730","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/posts\/29730","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/comments?post=29730"}],"version-history":[{"count":0,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/posts\/29730\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/media?parent=29730"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/categories?post=29730"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/tags?post=29730"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}