Go to Jeff Salisbury LWGate Home Page.From: "Katherine Malm" <kmalm@earthlink.net>
Subject: Re: [CANSLIM] Accounting Shenanigans
Date: Thu, 24 Jan 2002 19:31:40 -0600
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Tom,
I don't think we're really all that far apart here. I don't mean to =
imply that I'm doing enough financial homework in the 10K's and 10Q's to =
build an EPS estimate from the ground up. I can think of at least 100 =
other things I'd rather do in my spare time. So far, I haven't talked =
anyone into doing this *for* me for free, either! What I am doing when I =
take a peek at the SEC filings is a "test of reasonableness." What are =
the past trends in EPS/Rev? How do they recognize income? What do they =
have in the works that would blow holes in the estimates? Is there =
anything like financial litigation pending that could adversely impact =
the estimates? Is management forthright about what is working and not =
working right now or are they unreasonably rosy in their assessment? (I =
really hate that) Do they have significant reserves or receivables that =
seem out of line? etc. These are quick peeks and I devote limited time =
unless there's something that jumps off the page and hollers "pay =
attention"! All in all, even if this quick review lasted 4 minutes, I'd =
say it's worth it. That said, stocks have to pass a lot of hurdles for =
me to get this far, so the number of stocks requiring financial review =
are actually quite small. I'd say I do five for every one I end up =
buying.
Katherine
----- Original Message -----=20
From: Tom Worley=20
To: canslim@lists.xmission.com=20
Sent: Thursday, January 24, 2002 6:41 PM
Subject: Re: [CANSLIM] Accounting Shenanigans
Katherine, up to a point I agree with you. But I pay a respectable =
amount of money for the services (and data) of DGO. If I find that data =
is wrong, I complain. I am paying them this money to collect in one =
place a lot of data, and I expect it to be correct.
It would be different if I was using some free service on the net, =
then it's worth just what I am paying, and my responsibility to check =
the data.
When I look at a DGO chart, and there is no earnings estimates given, =
I understand it's going to be my job to do that. But when I see a =
forecast there from one or more analysts, I also have the right, IMO, to =
presume they (the analysts) did their job correctly, at least in terms =
of reading factual material like 10Q/K reports, and news releases. Where =
I accept their error is in trying to forecast the future. But the =
presence of a forecast, even if it appears too high, should give me =
assurance I don't have to go read a stack of historical reports unless I =
have questions.
Tom Worley
stkguru@netside.net
AIM: TexWorley
----- Original Message -----=20
From: Katherine Malm=20
To: canslim@lists.xmission.com=20
Sent: Thursday, January 24, 2002 7:17 PM
Subject: [CANSLIM] PSFT: Accounting Shenanigans
Tom, I have accidentally deleted your last comment on this issue, so =
this is a continuation of the discussion.
After reading your comments about analysts doing what is expected of =
them, trusting the DGO to use diligent researchers, etc, a few thoughts =
came to mind.
First regards earnings estimates. This is where the analysts are =
supposed to do the leg work for us by pouring through the financials, =
interviewing the company, etc etc. But this is only *one* piece of =
information in the DGO charts and only *one* of many hurdles that a =
stock candidate must pass to be considered a buyable candidate under =
CANSLIM guidelines. I use the forward growth rate as the single most =
important hurdle when considering a candidate. If it doesn't pass =
minimum standards, I don't even look at the stock. So far, I've not met =
many forecasters who *under* forecast anything, so meeting a minimum =
hurdle doesn't lose any candidates. But what it *does* do is let =
marginal companies with marginal businesses and high expectations by the =
analyst community past the gate. This is the first reason that I think =
due diligence is necessary. During this process, I am looking at the =
business to see if the estimates pass the test of reasonableness. I =
don't take anybody at their word when it comes to forecasting. I've =
dealt with too many manufacturing businesses to know better.
Second has to do with past fundamentals. When DGO reports, they use =
the proforma numbers NOT the GAAP numbers. In other words, they delete =
all the one time and extraordinary charges just like everybody else =
before they report and calculate the resultant QoQ and YoY growth rates. =
Every once in a while, they can't take the extraordinary items out per =
their procedure, so they put a little mark next to the numbers to let =
you know this. BUT, they don't adjust any of the growth rates as a =
result. So here we already have a big discrepancy. I first became keenly =
aware of this when I owned JDSU in '99-'00. I'm looking at the GAAP =
numbers and seeing red, looking at the proforma numbers and seeing =
green. Not only that, but the difference was *huge.* So, again, due =
diligence and digging through the 10K's and 10Q's to sniff out the =
quality of earnings and revenues is a must in my mind. Also, any =
shenanigans around balance sheets would only show up in the ROE numbers =
reported in DGO and/or in the cashflow vs. EPS comparisons. When these =
numbers don't jibe...I'm off to the 10K's with red pen in hand. In all, =
this is the very reason that I do not mine for candidates based on DGO =
data. I *especially* don't trust the EPS rankings and I pretty much =
ignore the SMR in favor of doing my own assessment of revenues, margins, =
earnings, ROE and cashflow. It takes time, but I think in the end it's =
worth it. It certainly doesn't mean I'm an expert at it, but at least =
I've put forth the effort. In the end, I have only myself to blame and =
not some 27 year old kid getting paid $1m/year to have lunch with CEO's.
Speaking of which....here's the due diligence blunder of the year... =
MCAF...will its lessons never end?
After some follow-up discussions here on my MCAF selling blunder, I =
wrote to MCAF's IR department asking them exactly how they generated =
income from the "Windows XP tie-in" that was so heavily touted about the =
time MCAF started its run. This I should have done *while* I was doing =
my DD, not in post analysis. Here is the IR reply to my inquiry:
My question:
It was my understanding that MCAF was the security service of choice =
under the Microsoft Windows XP OS, yet a friend of mine recently =
purchased a Dell with XP and it came with Symantec's product installed. =
How, specifically does the tie in work and how does it generate revenues =
for MCAF?
Dear Ms Malm:
McAfee.com is a tab in the XP version of Windows Instant Messenger. =
Windows Messenger has a large community of users and by putting our =
services in front of so many users; it will translate to subscribers, =
which will translate to revenue.
Dell has chosen the Symantec product to bundle on its computers.
Regards,
Marisa Lewis, Investor Relations Manager
Well...I'll mark this one for the "journal of duh", as one of my =
friends likes to call it. --Katherine
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<DIV>Tom,</DIV>
<DIV> </DIV>
<DIV>I don't think we're really all that far apart here. I don't mean to =
imply=20
that I'm doing enough financial homework in the 10K's and 10Q's to build =
an EPS=20
estimate from the ground up. I can think of at least 100 other =
things I'd=20
rather do in my spare time. So far, I haven't talked anyone into doing =
this=20
*for* me for free, either! What I am doing when I take a peek at the SEC =
filings=20
is a "test of reasonableness." What are the past trends in EPS/Rev? How =
do they=20
recognize income? What do they have in the works that would blow holes =
in the=20
estimates? Is there anything like financial litigation pending that =
could=20
adversely impact the estimates? Is management forthright about what is =
working=20
and not working right now or are they unreasonably rosy in their =
assessment? (I=20
really hate that) Do they have significant reserves or receivables that =
seem out=20
of line? etc. These are quick peeks and I devote limited time unless =
there's=20
something that jumps off the page and hollers "pay attention"! All in =
all, even=20
if this quick review lasted 4 minutes, I'd say it's worth it. That said, =
stocks=20
have to pass a lot of hurdles for me to get this far, so the number of =
stocks=20
requiring financial review are actually quite small. I'd say I =
do five for=20
every one I end up buying.</DIV>
<DIV> </DIV>
<DIV>Katherine</DIV>
<BLOCKQUOTE dir=3Dltr=20
style=3D"PADDING-RIGHT: 0px; PADDING-LEFT: 5px; MARGIN-LEFT: 5px; =
BORDER-LEFT: #000000 2px solid; MARGIN-RIGHT: 0px">
<DIV style=3D"FONT: 10pt arial">----- Original Message ----- </DIV>
<DIV=20
style=3D"BACKGROUND: #e4e4e4; FONT: 10pt arial; font-color: =
black"><B>From:</B>=20
<A title=3Dstkguru@netside.net href=3D"mailto:stkguru@netside.net">Tom =
Worley</A>=20
</DIV>
<DIV style=3D"FONT: 10pt arial"><B>To:</B> <A =
title=3Dcanslim@lists.xmission.com=20
=
href=3D"mailto:canslim@lists.xmission.com">canslim@lists.xmission.com</A>=
</DIV>
<DIV style=3D"FONT: 10pt arial"><B>Sent:</B> Thursday, January 24, =
2002 6:41=20
PM</DIV>
<DIV style=3D"FONT: 10pt arial"><B>Subject:</B> Re: [CANSLIM] =
Accounting=20
Shenanigans</DIV>
<DIV><BR></DIV>
<DIV><FONT face=3DArial>Katherine, up to a point I agree with you. But =
I pay a=20
respectable amount of money for the services (and data) of DGO. If I =
find that=20
data is wrong, I complain. I am paying them this money to collect in =
one place=20
a lot of data, and I expect it to be correct.</FONT></DIV>
<DIV><FONT face=3DArial></FONT> </DIV>
<DIV><FONT face=3DArial>It would be different if I was using some free =
service=20
on the net, then it's worth just what I am paying, and my =
responsibility to=20
check the data.</FONT></DIV>
<DIV><FONT face=3DArial></FONT> </DIV>
<DIV><FONT face=3DArial>When I look at a DGO chart, and there is no =
earnings=20
estimates given, I understand it's going to be my job to do that. But =
when I=20
see a forecast there from one or more analysts, I also have the right, =
IMO, to=20
presume they (the analysts) did their job correctly, at least in terms =
of=20
reading factual material like 10Q/K reports, and news releases. Where =
I accept=20
their error is in trying to forecast the future. But the presence of a =
forecast, even if it appears too high, should give me assurance I =
don't have=20
to go read a stack of historical reports unless I have =
questions.</FONT></DIV>
<DIV><FONT face=3DArial></FONT> </DIV>
<DIV>Tom Worley<BR><A=20
href=3D"mailto:stkguru@netside.net">stkguru@netside.net</A><BR>AIM:=20
TexWorley</DIV>
<BLOCKQUOTE dir=3Dltr=20
style=3D"PADDING-RIGHT: 0px; PADDING-LEFT: 5px; MARGIN-LEFT: 5px; =
BORDER-LEFT: #000000 2px solid; MARGIN-RIGHT: 0px">
<DIV style=3D"FONT: 10pt arial">----- Original Message ----- </DIV>
<DIV=20
style=3D"BACKGROUND: #e4e4e4; FONT: 10pt arial; font-color: =
black"><B>From:</B>=20
<A title=3Dkmalm@earthlink.net =
href=3D"mailto:kmalm@earthlink.net">Katherine=20
Malm</A> </DIV>
<DIV style=3D"FONT: 10pt arial"><B>To:</B> <A =
title=3Dcanslim@lists.xmission.com=20
=
href=3D"mailto:canslim@lists.xmission.com">canslim@lists.xmission.com</A>=
=20
</DIV>
<DIV style=3D"FONT: 10pt arial"><B>Sent:</B> Thursday, January 24, =
2002 7:17=20
PM</DIV>
<DIV style=3D"FONT: 10pt arial"><B>Subject:</B> [CANSLIM] PSFT: =
Accounting=20
Shenanigans</DIV>
<DIV><BR></DIV>
<DIV>Tom, I have accidentally deleted your last comment on this =
issue, so=20
this is a continuation of the discussion.</DIV>
<DIV> </DIV>
<DIV>After reading your comments about analysts doing what is =
expected of=20
them, trusting the DGO to use diligent researchers, etc, a few =
thoughts came=20
to mind.</DIV>
<DIV> </DIV>
<DIV>First regards earnings estimates. This is where the analysts =
are=20
supposed to do the leg work for us by pouring through the =
financials,=20
interviewing the company, etc etc. But this is only *one* piece of=20
information in the DGO charts and only *one* of many hurdles that a =
stock=20
candidate must pass to be considered a buyable candidate under =
CANSLIM=20
guidelines. I use the forward growth rate as the single most =
important=20
hurdle when considering a candidate. If it doesn't pass minimum =
standards, I=20
don't even look at the stock. So far, I've not met many forecasters =
who=20
*under* forecast anything, so meeting a minimum hurdle doesn't lose =
any=20
candidates. But what it *does* do is let marginal companies with =
marginal=20
businesses and high expectations by the analyst community past the =
gate.=20
This is the first reason that I think due diligence is necessary. =
During=20
this process, I am looking at the business to see if the estimates =
pass the=20
test of reasonableness. I don't take anybody at their word when it =
comes to=20
forecasting. I've dealt with too many manufacturing businesses to =
know=20
better.</DIV>
<DIV> </DIV>
<DIV>Second has to do with past fundamentals. When DGO reports, they =
use the=20
proforma numbers NOT the GAAP numbers. In other words, they delete =
all the=20
one time and extraordinary charges just like everybody else before =
they=20
report and calculate the resultant QoQ and YoY growth rates. Every =
once in a=20
while, they can't take the extraordinary items out per their =
procedure, so=20
they put a little mark next to the numbers to let you know this. =
BUT, they=20
don't adjust any of the growth rates as a result. So here we already =
have a=20
big discrepancy. I first became keenly aware of this when I owned =
JDSU in=20
'99-'00. I'm looking at the GAAP numbers and seeing red, looking at =
the=20
proforma numbers and seeing green. Not only that, but the difference =
was=20
*huge.* So, again, due diligence and digging through the 10K's and =
10Q's to=20
sniff out the quality of earnings and revenues is a must in my mind. =
Also,=20
any shenanigans around balance sheets would only show up in the ROE =
numbers=20
reported in DGO and/or in the cashflow vs. EPS comparisons. When =
these=20
numbers don't jibe...I'm off to the 10K's with red pen in hand. In =
all, this=20
is the very reason that I do not mine for candidates based on DGO =
data. I=20
*especially* don't trust the EPS rankings and I pretty much ignore =
the SMR=20
in favor of doing my own assessment of revenues, margins, earnings, =
ROE and=20
cashflow. It takes time, but I think in the end it's worth it. It =
certainly=20
doesn't mean I'm an expert at it, but at least I've put forth the =
effort. In=20
the end, I have only myself to blame and not some 27 year old kid =
getting=20
paid $1m/year to have lunch with CEO's.</DIV>
<DIV> </DIV>
<DIV>Speaking of which....here's the due diligence blunder of the =
year...=20
MCAF...will its lessons never end?</DIV>
<DIV> </DIV>
<DIV>After some follow-up discussions here on my MCAF selling =
blunder, I=20
wrote to MCAF's IR department asking them exactly how they generated =
income=20
from the "Windows XP tie-in" that was so heavily touted about the =
time MCAF=20
started its run. This I should have done *while* I was doing my DD, =
not in=20
post analysis. Here is the IR reply to my inquiry:</DIV>
<DIV> </DIV>
<DIV>My question:</DIV>
<DIV>
<P class=3DMsoNormal style=3D"MARGIN-LEFT: 0.5in"><FONT =
face=3D"Times New Roman"=20
size=3D3><SPAN style=3D"FONT-SIZE: 12pt">It was my understanding =
that MCAF was=20
the security service of choice under the Microsoft Windows XP OS, =
yet a=20
friend of mine recently purchased a Dell with XP and it came with =
Symantec's=20
product installed. How, specifically does the tie in work and how =
does it=20
generate revenues for MCAF?<o:p></o:p></SPAN></FONT></P></DIV>
<DIV> </DIV>
<DIV><FONT face=3DArial color=3Dnavy size=3D2><SPAN=20
style=3D"FONT-SIZE: 10pt; COLOR: navy; FONT-FAMILY: Arial">Dear Ms=20
Malm:<o:p></o:p></SPAN></FONT></DIV>
<DIV>
<P class=3DMsoNormal><FONT face=3DArial color=3Dnavy size=3D2><SPAN=20
style=3D"FONT-SIZE: 10pt; COLOR: navy; FONT-FAMILY: =
Arial"><o:p></o:p></SPAN></FONT></P>
<P class=3DMsoNormal><FONT face=3DArial color=3Dnavy size=3D2><SPAN=20
style=3D"FONT-SIZE: 10pt; COLOR: navy; FONT-FAMILY: =
Arial">McAfee.com is a tab=20
in the XP version of Windows Instant Messenger. Windows Messenger =
has a=20
large community of users and by putting our services in front of so =
many=20
users; it will translate to subscribers, which will translate to=20
revenue.<o:p></o:p></SPAN></FONT></P>
<P class=3DMsoNormal><FONT face=3DArial color=3Dnavy size=3D2><SPAN=20
style=3D"FONT-SIZE: 10pt; COLOR: navy; FONT-FAMILY: =
Arial"><o:p> </o:p></SPAN></FONT><FONT=20
face=3DArial color=3Dnavy size=3D2><SPAN=20
style=3D"FONT-SIZE: 10pt; COLOR: navy; FONT-FAMILY: Arial">Dell has =
chosen the=20
Symantec product to bundle on its =
computers.<o:p></o:p></SPAN></FONT></P>
<P class=3DMsoNormal><FONT face=3DArial color=3Dnavy size=3D2><SPAN=20
style=3D"FONT-SIZE: 10pt; COLOR: navy; FONT-FAMILY: =
Arial"><o:p></o:p></SPAN></FONT></P>
<DIV>
<P class=3DMsoNormal><FONT face=3DArial color=3Dnavy size=3D2><SPAN=20
style=3D"FONT-SIZE: 10pt; COLOR: navy; FONT-FAMILY: Arial; =
mso-no-proof: yes">Regards,</SPAN></FONT></P>
<P class=3DMsoNormal><FONT face=3DArial color=3Dnavy size=3D2><SPAN=20
style=3D"FONT-SIZE: 10pt; COLOR: navy; FONT-FAMILY: Arial; =
mso-no-proof: yes"></SPAN></FONT><FONT=20
face=3DArial color=3Dnavy size=3D2><SPAN=20
style=3D"FONT-SIZE: 10pt; COLOR: navy; FONT-FAMILY: Arial; =
mso-no-proof: yes">Marisa=20
Lewis, </SPAN></FONT><FONT face=3DArial color=3Dnavy size=3D2><SPAN=20
style=3D"FONT-SIZE: 10pt; COLOR: navy; FONT-FAMILY: Arial; =
mso-no-proof: yes">Investor=20
Relations Manager</SPAN></FONT></P>
<P class=3DMsoNormal><FONT face=3D"Times New Roman" =
color=3D#000000><SPAN=20
style=3D"FONT-SIZE: 10pt; COLOR: navy; FONT-FAMILY: Arial; =
mso-no-proof: yes"><STRONG><EM>Well...I'll=20
mark this one for the "journal of duh", as one of my friends likes =
to call=20
it. =20
- --Katherine</EM></STRONG></SPAN></FONT></P></DIV></DIV></BLOCKQUOTE></BLO=
CKQUOTE></BODY></HTML>
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