'Then No One Can Pull the Wool Over Your Eyes'

How I got started on my 'truth teller' path... 'Then no one can pull the wool over your eyes'... 180 of the top 300 money managers read our research... One example of how not knowing the true numbers can hurt you... Access my 'Investment Truth Detector' leading up to next week's event...

Editor's note: As Bryan Beach explained in yesterday's Digest, our good friend Professor Joel Litman has developed a powerful system for determining the true earnings and profitability of some of the best- and least-known stocks in America.

And next Wednesday night, September 25, at 8 p.m. Eastern time, Porter will join Joel as he walks through a live demonstration of his "Investment Truth Detector." Nearly 25,000 people have already registered for this special online event. Save your seat here.

We want to spread the word about Joel and his remarkable system to as many folks as possible. So we asked him to write today's Digest. In it, you'll learn about Joel's background... one familiar company that his system identified before it soared... and why he's now bringing this approach to individual investors like yourself...

I (Joel Litman) started on my 'truth teller' path because of my mom...

When I was looking into universities and careers, she advised me simply: "Become an accountant. Learn the language of business. Then no one can pull the wool over your eyes."

At the time, I had no idea how prescient that advice would be.

In my first job, I was fortunate to work for a boutique accounting firm in Chicago with two bosses and mentors – Dr. Barry Epstein and Ralph Nach – who I remain close friends with today. They were authors of the Bible of accounting, the more than 1,000-page Wiley GAAP: Interpretation and Application.

I was lucky. I had the opportunity, from the very beginning, to see accounting through the eyes of two of the most expert accountants in the world.

A few years later, I moved to Deloitte to consult firms on how to calculate their economic performance, as well as what really drove their stock price. I had the opportunity to work for another key mentor in my life, Bart Madden.

At the time, Madden had done more research than anyone else into the failure of accounting to represent the cash flows of a firm. He provided a necessary foundation for understanding how financial statements were wholly unreliable for valuation.

Nothing about the problems Madden highlighted decades ago has changed. If anything, the problems are more critical than ever. As I'll explain, reporting in the financial media amplifies these warped valuations. This leads individual investors to buy stocks that are overly praised... and pass on many of the real gems in the market.

The good news is that if you know what to look for, you can find these hidden gems long before the majority of investors catch on. And by owning their shares, you can enjoy tremendous returns. Let me explain...

Wall Street doesn't always mean to lie to you...

Most Wall Street analysts are bright people, as are many of the financial journalists and advisers around the U.S.

The big problem is most of them lack sufficient knowledge of the incredible complexity and issues buried in the financial statements.

Wall Street and the financial press seem to accept published earnings and valuations as if they are reliable.

They're not. They're simply wrong.

With Bart Madden's encouragement, I left a career in management consulting to join investment-banking research at Credit Suisse First Boston.

My years on Wall Street were an amazing experience. I still work with executives and clients whom I met through the incredible networking available at that investment bank.

But it was also eye-opening...

I learned how incredibly lacking Wall Street research is in understanding the gross inconsistencies and distortions in financial statements. Wall Street's attention to GAAP earnings and GAAP-based financial metrics in general seemed nearly unbelievable. That problem was – and still is – endemic across the entire Street.

Wall Street is filled with amazing industry experts, many of whom know more about their covered companies and their management histories than the companies know themselves. They also hold great conferences.

However, the track record of Wall Street target prices and buy and sell recommendations is atrocious.

The empirical research confirms that Wall Street analysts are terrible at predicting stock prices and at recommending stocks. The extensive proof about their stock opinions' lack of value has been conducted and published by many colleagues of mine. It shows that Wall Street stock opinions are, from that perspective, laughable.

In 2004, a great friend and teaching colleague, Dr. Mark Frigo, and I wrote a case study for the Harvard Business Review titled, "Give My Regrets to Wall Street." The case studied the chronicles and tribulations of a CEO dealing with the biases and problems with Wall Street.

I would soon give my own, personal regrets to a Wall Street career...

At that time, I began envisioning leaving the Street to create what I now call "The Investment Truth Detector."

For the past 10 years, at my institutional-focused business Valens Research, we have tried to do everything that Wall Street wouldn't and couldn't do for the benefit of the investors.

We've built a database of more than 32,000 companies worldwide. Our team "fixes" financial statements and produces unique valuation metrics and insights.

We have identified more than 130 inconsistencies within GAAP and the International Financial Reporting Standards ("IFRS") financial reporting that cause earnings, the balance sheet, and key financial metrics to be terribly distorted across peers and from year to year within single companies.

Take streaming-device maker Roku (ROKU), for example...

Roku regularly dominates the "best of" lists from the folks at tech-focused sites 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 return on assets ("ROA") number is negative.

And if you were watching the market this week, the stock fell about 14% after Facebook (FB) released its $149 "Portal TV" streaming device... and Comcast (CMCSA) announced it would give a free streaming box to Internet-only subscribers.

But 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 stick, Apple TV, and others... for years. And its financial situation isn't exactly as it seems...

We specialize in "Uniform Accounting" – a more reliable way of looking at companies than the GAAP and IFRS accounting policies, which are designed to be unclear and misleading.

When we look at Roku's cleaned-up numbers, we can see it is a profitable business...

If you had paid attention to the as-reported numbers, you never would have purchased the stock. And you would have missed out on big gains... as the stock has rallied several hundred percent from its December lows, despite the recent dip.

That's the power of Uniform Accounting...

Roku's surge 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.

When we apply our Uniform Accounting metrics, the distortions from as-reported accounting statements are removed – including capitalization versus expensing leases and research and development ("R&D"), and stock option expense distortions – and we can immediately see that Roku has much stronger ROA than the market realizes.

Not only that, but Roku has been profitable for as long as it has been a public company...

The panel above explains the company's historical corporate performance levels, in terms of ROA (dark blue bars). Generally, 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. It also benefits greatly from the growth in streaming services over the last several months.

When you understand the true earnings of a business, the upside can be incredible.

The approach that my team and I take with Uniform Accounting is similar to the contrarian perspectives familiar to Stansberry Research readers...

For example, I know that Steve Sjuggerud recommended Roku as part of his "Melt Up" model portfolio in True Wealth Systems earlier this year. The stock is up 200% since then.

And Porter Stansberry recommended buying Roku in the model portfolio of his Stansberry's Investment Advisory in September 2018.

He was stopped out last winter as the market reacted to its as-reported earnings rather than the true numbers that we track with our Uniform Accounting... But still, the stock has more than doubled from his initial recommendation.

Of course, we don't just look at the numbers...

We've also added other unique forensic research tools to analyze the financials, management's comments, and public statements to see if the words, numbers, and tones match.

These deeply investigative techniques are things Wall Street would never do for fear of losing its corporate clients.

For our investor clients, we've seen interest and uptake we would never have conceived of early on.

Today, our work is read every month by more than 180 of the top 300 investors in the world...

In fact, nine of the top 10 firms on the planet have analysts and portfolio managers downloading and reading this unique and powerful valuation work.

Now, I am hoping to share as many insights as we can with you... These come from what we've learned from a foundation of hardcore accounting analysis, years on and off Wall Street, and from and with our institutional investor clients.

What has been previously reserved for the highest echelons of investment management... we're now able to share with you.

Next week, I'm sharing my 'Investment Truth Detector' with the public...

You see, Roku is just one example. Distortions like the one I showed you in Roku happen all the time. For instance, about five years ago, I described in Barron's magazine a similar distortion in chipmaker Advanced Micro Devices (AMD). At the time, the stock was trading for $3 a share. Today, it's up about 1,100%.

So to help individual investors take advantage of these distortions. I've built what I'm calling the "Investment Truth Detector." My Truth Detector will show you the true ROA on any publicly traded stock... and it will reveal if the market is overvaluing it... or overlooking it.

Next week, I'm holding a special online event to share my valuation system and show how individual investors can use it to find stocks with huge hidden upside potential.

As part of the presentation, I'll be sharing the details of the No. 1 stock in America to own right now. It's a company that doesn't get the attention it deserves. But from what my system is telling me, I believe its shares could soar as much as 500%.

I'll also share with you one tech stock you must avoid. If you're holding it, you should sell right away.

We're calling the event the Wall Street Exposé and it's happening Wednesday, September 25, at 8 p.m. Eastern time. To learn more and sign up to participate, click here.

New 52-week highs (as of 9/19/19): Celgene (CELG), Hannon Armstrong Sustainable Infrastructure Capital (HASI), Medtronic (MDT), and ProShares Ultra Utilities Fund (UPW).

Well, it seems at least one Digest reader appreciated Dan Ferris' response to the "grammar police." What's on your mind? Let us know at feedback@stansberryreserach.com.

"For Dan Ferris and his rebuttal to the grammar police: Good on ya, Dan. When I came across your word, gabish, I immediately made the connection. How? Because I recently binge-watched all the years of 'The Sopranos.' Out of curiosity, somewhere along the way I googled 'gabagool,' and got up to speed with Italian slang." – Paid-up subscriber Barbara D.

Regards,

Joel Litman
Tokyo, Japan
September 20, 2019