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Beige Book Shows “Slight to Modest” Economic Growth

The Fed released its final Beige Book before the presidential election this week. Offering a qualitative look at the economy on a regional basis, the Beige Book can be worth a quick read. The most recent edition seems to affirm the thinking of many regarding the economic recovery: it has slowed.  Economic gains were described as “slight to modest” in this month’s edition. This is better than the “sharp and abrupt” contraction highlighted in the nadir of the COVID-19 pandemic. But “slight and modest” could leave something to be desired. Especially for a Fed that is not just looking to support the economic recovery but also accommodate the expansion. So, is “slight to modest” enough to warrant a policy response out of the Fed? “Not quite yet” seems the most natural answer to me. But with the stalemate over a new coronavirus relief package looking like it will eventually come to an end, we could see that change. If you were not aware of where the Fed stands on the stimulus debate, the economic adage of “more is better” does a decent job of explaining the Fed’s position. But what the Fed could eventually do to further support the expansion remains to be seen. Increases in asset purchases, yield curve control (i.e. explicitly targeting interest rates along the Treasury term structure), shifting asset purchases to the longer-end of the yield curve, or a combination of the three seem possible. One thing is for sure.  The Fed’s policy interest rate is not changing anytime soon. Rates are at their effective lower bound and absent a major change in thinking, I doubt the Fed is going negative. Hikes are equally, if not more, unlikely. Per the most recent economic projections, most FOMC participants don’t see inflation hitting the Fed’s new two percent average inflation target until 2023. And with the new policy in place of tolerating inflation above two percent to achieve an average of two percent over time, I wouldn’t be surprised if we don’t see a rate hike until 2024-2025. Wow. The Fed’s balance sheet grew to a new all-time high this week, inching above its prior June high to $7.2 trillion. Asset purchases continue to the tune of $80 billion worth of treasury and $40 billion worth of mortgage backed securities per month. They show no signs of slowing down. The yield on the benchmark 10-year U.S. Treasury is 0.83% up from 0.74% last week. Next FOMC meeting is Nov. 4-5.  No action expected.

Clock Seems to Have Run Out on Pre-Election Stimulus Deal

While I have been an optimist about the chances for a pre-election agreement between Speaker of the House Nancy Pelosi and Secretary of the Treasury Steven Mnuchin, the clock seems to have run out. Last night the Speaker said that her fellow House Democrats don’t want to return to vote on a deal if the Senate won’t take the bill up; and Senate Majority Leader Mitch McConnell has said the Senate opposes a pre-election vote. I think that by invoking the position of the House Democratic Caucus, the Speaker is telegraphing the no bill message. Both sides will talk about a bill in the lame duck session of Congress; but that could be tough. If President Trump is defeated, he is unlikely to devote time to a deal. And a big deal requires his personal lobbying of Senate Republicans.  Defeated members usually show their dejection by not coming back to Congress for weeks. If Biden wins, there may be pressure from Democrats to just wait until there is a new President.  This is all bad news for the 23 million Americans who don’t have jobs, testing programs that need money, schools that are in need of funding to bring kids back; the list goes on and on. The debate was at least more civil: between a moderator who did her job, and the new mute mic policy helped a lot by eliminating the distraction of shouting over each other.  The President’s more Presidential behavior likely shored up support from some supporters who were turned off by his performance in the first debate. Biden’s strong statements on immigration, climate change, and racial divides likely appealed to his supporters and any lingering undecided voters.

GRANNY SHOTS: Best bets in 2020 - Week 43

Below we’ve highlighted stocks that we recommend across at least two of our investment strategies for 2020. These companies could benefit from multiple themes and secular tailwinds – clear picks in our view for the second half of 2020. Figure: Granny Shots are the “best of the best”Stocks which appear in multiple themes. Source: FSInsight Figure: Granny Shots Portfolio PerformanceMonthly. Source: FSInsight. FactSet as of 10/22/20 Figure: Intersection of investment recommendations by strategyAs of 10/22/20, Source: FSInsight, FactSet The stocks in the Granny Shots portfolio collectively outperformed the S&P 500 by 3960 bps since its inception (S&P 500 is up 33.0% during the same period).

Don’t Lose Sight of Improving Technical Backdrop into 2021

One of the biggest benefits of studying technical analysis, observing the change in prices across asset classes, is that it filters out the mainstream and social media noise we are all bombarded with. Investors are overwhelmed with election rhetoric, renewed COVID-19 concerns, stimulus talks that are on and off again every day not to mention the volatility of earnings reports. It’s no wonder equity markets have remained in choppy trading ranges since the beginning of September with many investors struggling for conviction in either direction. I’m obviously biased as a technical analyst, but I am far more interested in what IS changing between and within markets and less concerned with someone’s explanation as to WHY they are changing. As one seasoned portfolio manager with over four decades of experience managing a large international portfolio regularly reminds me “Rob, your job is to identity what IS changing in markets and it’s the media’s job to try to weave together stories that try to explain WHY”. This is a particularly important point to remember at the momentum as the headline drama builds into another election. Why? The first key technical point is to stay focused on the fact that the underlying market cycle, generally measured over a 3-4 years, is rarely disrupted by an election. By my analysis, the current 4-year markets cycle should carry markets higher through 2021 well into 2022 before we see evidence of a cycle peak. Secondly, despite the choppy trading that has developed since the beginning of September, there are a number of bullish internal leadership shifts developing. Growth stocks are pausing but are not breaking down while participation is broadening to a growing number of cyclical groups. I view this rotation to cyclicals as a healthy development for equity markets into and well through year-end. In addition, the behavior of other assets classes remains supportive of the rotation developing within equity markets with 10-year bond yields continuing to show evidence of bottoming. Flowserve (FLS) - A contrarian cyclical recovery idea in the early stages of bottoming. I continue to encourage investors to ignore the headline noise and choppy trading for the coming weeks and to remain positioned in the direction of the improving longer-term cycle. Specifically, use near-term pullbacks to continue broadening portfolio exposure to include more cyclicals as part of a bar-bell portfolio that already includes core positions in many of the leading growth stocks. Fundstrat’s Tom Lee and Ken Xuan publish six thematic portfolios one of which is a PMI Recovery basket. I would encourage investors looking for a list of stocks that should be beneficiaries of an improving economy to review this list. For contrarian investors, I’m highlighting FLS as a laggard within that list that in the very early stages of bottoming as it begins to rally above its 200-dma and reversing its 2020 relative performance downtrend.  Figure: Weekly Sector ReviewSource: FSInsight, FactSet Discretionary and technology uptrends intact but pausing while industrials, materials continue to trend above the 50-day moving averages of their relative performance lines versus the S&P 500. Financials have stabilized and are potentially within striking distance of rallying above relative performance downtrends. Stay tuned. Figure: Best and worst performance sectors over past 3 months

Stocks Down 0.5% on Week; Stimulus Should be “when not if”

One of the top market rules for me, maybe even rule #1, is never to try to impose my views on the markets.  And perhaps, it is more useful to try to decipher the message from market behavior.  If I had to describe equities over the past week, they seemed to have been treating fiscal stimulus as a binary event. Regardless of the fact that this seems more of a “when not if” question to me. More on this below. On the COVID-19 front, the trend in daily cases continued rising this week. This has been the case for the past few weeks and I see two major takeaways: (i) US cases could reach 70,000 within 2 weeks, matching the July highs, (ii) Because the spread is primarily in 11 states, we might be nearing peak velocity in those states. We are still in wave 3 of COVID-19 in the US. And this wave, so far, is primarily a spread of cases in states that were largely unscathed in wave 1 (NY tristate +MA +RI) and wave 2 (FL, CA, AZ, TX, or F-CAT along with 19 tag along states). And this means COVID-19 is finding its way into areas of the US which are caught off guard. So, part of the key over the next few weeks is for policymakers and citizens in these 20-ish states to panic enough to reduce the spread. There must be some of this taking place already, as daily cases are increasing but not soaring exponentially. And even states like South Dakota and North Dakota might already have reached peak velocity. I think hospitalizations are increasingly a better measure for tracking COVID-19 spread and severity.  I see several reasons for this: (i) expanded testing is leading to more detected cases, but not necessarily meaning rising infection, (ii) wide scale testing at schools, offices, certain businesses, means we will see greater detection (iii) there are many people who are testing PCR positive but are recovered. In fact, the testing positivity rate in the US is 6.2% right now, well below 9% of wave 2. (see chart nearby).  And in wave 1 and wave 2 states, positivity rates are very low. So, on balance, I am feeling a bit better about COVID-19 this week, despite the fact that cases and we could reach 70,000 within a few weeks. STRATEGY: Markets implying fiscal deal a binary event but it is when not if For the millions of Americans with stimulus benefits expiring, the next coronavirus relief package is truly critical.  Those who need this next installment of payments are those who are relying on the US for the safety net. However, I see less at stake for equities.  In other words, it does entirely make sense to me that stocks were stuck in neutral and seem to pivot on fiscal stimulus updates.  But I revert to the rule #1, I can't tell markets what to do. And despite the fact that a stimulus deal did not happen this week, it will happen before year end. This week JPMorgan's Fixed Income team made a very interesting comment. Their strategists suggest that US High-yield defaults have peaked for this cycle. This is a significant statement. High-yield is a close cousin of equities.  And this economic depression has led to a surge in defaults in High-yield.  But now, it looks like this cycle has peaked and if this is indeed the case, this is a major risk-on signal. Especially with 3Q20 earnings signaling that the EPS nadir is passed. Bottom Line: Given the fairly robust incoming economic data, high levels of cash on the sidelines, and high anxiety into elections, this surely seems to be a set-up for a pretty big post-election rally.  The more we churn here, the more impressive the post-election surge. Figure Comparative matrix of risk/reward drivers in 2020Per FSInsight Figure: FSInsight Portfolio Strategy Summary - Relative to S&P 500** Performance is calculated since strategy introduction, 1/10/2019

FSInsight 3Q20 Daily Earnings Update – 10/23/2020

Click HERE for the full earnings daily in PDF format. 88 companies are reporting this week. Of the 130 companies that have reported so far (27% of the S&P 500), 87% are beating earnings estimates by a median of 17%. On the top line, 78% are beating by an average of 9%.

CRYPTO SPECIAL REPORT: Zilliqa: Making a competitive play to capture the ASEAN Open Finance Market

For a full copy of this report in PDF format please click this link. Zilliqa Research Pte. LTD. (“the Company”) is the software and services company behind development of the Zilliqa DLT Network. The Singapore-based Company was founded in 2017 and is focused on refining Zilliqa’s DLT technology and deploying the platform with a focus on financial services applications in the ASEAN (“Association of Southeast Asian Nations”) region. Zilliqa (ZIL) is a public Distributed Ledger Technology (“DLT”) platform for decentralized applications (“dApps”). It employs sharding technology to achieve high levels of throughput and maintain low transaction fees. Zilliqa’s DLT offers a differentiated Blockchain-as-a-Service (BaaS) computing infrastructure platform. DLTs like Zilliqa allow businesses to leverage cloud-based solutions to build, deploy and use apps, smart contracts and other blockchain functions without hosting the infrastructure. Zilliqa’s sharded DLT enables high transaction throughput, with historically low fees, and offers a new smart contracting language, Scilla, to make its network safer for deploying enterprise-grade applications. First from Banking to Fintech, and now from Fintech to OpFi, Zilliqa looks focused on the right place. Zilliqa’s DLT is designed to support a range of use cases, but the team is currently laser focused on targeting the biggest one, banking. DLT based financial services, which we refer to collectively as Open Finance (“OpFi”), represent a cost-effective way to reach underserved markets and improve upon current infrastructure, while delivering unimagined financial applications through open APIs and new data access models. Disruption opportunities span payments, remittances, lending, investing, insurance and more. ASEAN OpFi represents a $7.2B revenue opportunity for ecosystems like Zilliqa by 2025 (Slide 34). We estimate that OpFi companies employing DLT in the region could capture 19% share from the digital banking market which represents a meager 2% of the overall ASEAN financial services market. ASEAN’s financial services market is ripe for disruption. Despite being collectively the 5th largest global economy, with rapid economic growth rates and high levels of internet penetration, ASEAN suffers from low levels of financial inclusion, with 75% of the population either unbanked or underbanked. Enterprises within the Zilliqa ecosystem could be worth $3.6B in 2025 by capturing 10% of ASEAN OpFi (Slide 35). Companies in the Zilliqa DLT ecosystem would generate $722M in revenue if our base model input is correct. We estimate the total value of areas where Zilliqa’s DLT can reduce costs to be ~$360M. Of these costs, we estimate enterprises save 50% using DLT, with the remaining $180M paid as fees to the Zilliqa DLT Network and Zilliqa Research. We assume industry net profit margins of 20% and a 25x P/E for our ecosystem valuation. Zilliqa’s DLT network and the ZIL token could be worth $3.9B and $0.22 using our 2025 model assumptions (Slide 37). From an assumed $64B serviceable market using Zilliqa’s DLT, we assume 30% use the ZIL token to facilitate the financial function(s) being served (i.e. using ZIL for payments or as loan collateral) and a 5x model velocity to reach our valuation. We assume 50% or $90M of DLT fees go to network nodes. As RedHat is to Linux, Zilliqa Research is to its DLT, which could earn the Company $118M in revenue and value it at $590M by 2025, should it successfully execute to our base model inputs (Slide 41). If Zilliqa Research can capture 50% of the DLT related fees (25% of savings) through provision of consulting and support services to companies building on its open-sourced network, it would earn the Company $90M in Enterprise Support revenue. The Company could earn an additional $9M in network fees and $19M in block rewards, for a total of $28M in BaaS revenue from its expected 10% Zilliqa DLT node ownership. Valuation assumes 20% profit margins on $118M in revenue with a 25x P/E.    Blockchain accelerator funds drive ecosystem growth. The launch of Zilliqa Capital, a proposed $50M - $200M ecosystem fund, holds the potential to strengthen the platform’s position as a leading regional player in ASEAN and APAC OpFi markets, if successfully launched (Slide 55). What could go wrong? DLT adoption in general could lag, resulting in underperformance. Zilliqa could fail to gain market share against competing DLT platforms with greater traction or alternative features. Failure to reach our assumptions (Slide 42). It’s early to estimate the market size and our approach may prove to be inaccurate as new markets emerge or fail to materialize. The Company may fail to gain product market fit and generate revenue from customers. Crypto is a volatile asset class with the potential for any token network to eventually lose significant value. Bottom line: Successful deployments in 2020 would validate the Company’s go to market strategy and the DLT’s utility in a production environment. We’ll continue looking for signs of increasing fundamental network growth, while keeping an eye on how strategic partnerships evolve over the coming months. Key slides from this report... Zilliqa: Making a competitive play to capture the ASEAN Open Finance Market (Slide 1)... Zilliqa Research could capture ~$120M in revenue by 2025 (Slide 32)... The platform technology stack is reshaping the delivery of banking (Slide 23)...  Zilliqa DLT Network is a platform technology for the Open Finance ecosystem (Slide 25)... Zilliqa DLT Network is a platform technology for the Open Finance ecosystem (Slide 26)... Ecosystem: Network effect and value creation feedback loop design (Slide 15)... Zilliqa Ecosystem Funds: Driving blockchain ecosystem growth (Slide 55)...  

FSInsight 3Q20 Daily Earnings Update – 10/22/2020

Click HERE for the full earnings daily in PDF format. 88 companies are reporting this week. Of the 99 companies that have reported so far (20% of the S&P 500), 88% are beating earnings estimates by a median of 16%. On the top line, 77% are beating by an average of 10%.

COVID-19 UPDATE: COVID-19 cases rising linearly, not exponentially --> tentatively a good thing. The more we churn, the greater the post-election rally.

Click HERE to access the FSInsight COVID-19 Daily Chartbook. HEADS UP: There will be no updates Friday and no updates next Monday. I will be getting surgery to repair my ACL on 10/22 and will be recovering on those dates. STRATEGY: Markets implying fiscal deal a binary event but it is when not ifThe more we churn, the larger the post-election rally... One of the top market rules for me, maybe even rule #1, is never to try to impose my views on the markets.  And it is perhaps more useful to try to decipher the message from market behavior (sadly, stocks can choose to speak any language it chooses... lol).  And if I had to describe equities over the past three days, it seems to be treating fiscal stimulus as a binary event.  If it doesn't happen this week, it is badIf it happens this week, it is goodFor the millions of Americans with benefits expiring, this is truly critical.  Those who need this next installment of payments are those who are relying on the US for the safety net. So the social implications are sizable. But if a deal doesn't come together this week (possible and House Speaker Pelosi is optimistic), a deal will happen before year end.  So while there are high stakes from a social net perspective, there should be less at stake for equities.  In other words, it does entirely make sense to me that stocks are stuck in neutral and seem to pivot on fiscal stimulus updates.  But I revert to the rule #1, I can't tell markets what to do. But given the fairly robust incoming economic data, and the high levels of cash on the sidelines, and given the high anxiety into elections, this surely seems to be a set-up for a pretty big post-election rally.  The more we churn here, the more impressive the post-election surge. We are still in wave 3 of COVID-19 in the US.  And this wave, so far, is primarily a spread of cases in states that were largely unscathed in wave 1 (NY tristate +MA +RI) and wave 2 (FL, CA, AZ, TX, or F-CAT along with 19 tag along states).  And this means COVID-19 is finding its way into areas of the US which are caught off guard.  So part of the key over the next few weeks is for policymakers and citizens in these 20-ish states to panic enough to reduce the spread.  There must be some of this taking place already, as daily cases are rising on a 7D basis (+5,938 vs 7D ago) but not soaring exponentially.  And even states like South Dakota and North Dakota might already have reached peak velocity. And wave 3 is showing some rises in wave 1 and wave 2 states, but to a far, far lesser extent.  And hospitalizations are barely rising in wave 1 and wave 2 states.  So I think it is more correct to view this wave 3 as rolling through new territory.  In fact, the positivity rate in the US is 6.2% right now, well below 9% of wave 2, and in the wave 1 and wave 2 states, positivity rates are very low. So on balance, I am probably feeling a bit better about COVID-19 this week, despite the fact that cases are rising and we could see 70,000 daily cases within a few weeks. POINT 1: Daily cases 58,421, up 5,938 vs 7D ago -- on track to hit 70,000 in two weeksThe latest COVID-19 daily cases came in at 58,421, up +5,938 vs 7D ago.  Today's figures are probably understated:- GA and AL did not report todayThe trend of cases is rising, something happening for the past few weeks, and our overall takeaways are:- US cases could reach 70,000 within 2 weeks, matching the July highs- Because the spread is primarily in 11 states, we might be nearing peak velocity in those states (daily cases per 1mm >500 trigger policy response)- Hospitalizations are more important, in our view, and while hospitalizations are rising, the levels are still quite low Source: COVID-19 Tracking Project  and FundstratUS daily cases 7D delta is up but not exponential... Again, the daily change vs 7D ago, in our view, is the leading indicator as it is what influences the 7D moving average.- Daily cases are rising vs 7D ago, but the rate of increase is been constant.- It does not seem to be accelerating (becoming exponential), which is key Source: COVID-19 Tracking and Fundstrat  Today saw a pretty big jump in NY state.  This is interesting. Look at the drops today, SD and ND which have been surging are posting a surprising decline.  This ties back to our statement of states hitting peak velocity. Source: COVID-19 Tracking and FundstratPOINT 2: Hospitalizations rising 16 states, not NY tristate, not F-CATWe have said this a few times over the past few weeks, but it is worth repeating again.  Hospitalizations are increasingly a better measure of COVID-19 spread and severity.  There are several reasons for this:- expanded testing is leading to more detected cases, but not necessarily meaning rising infection- wide scale testing at schools, offices, certain businesses, mean we will see greater detection- there are many testing PCR positive but are recoveredSo we think measuring hospitalizations is a more important measure.  The chart is from our daily Chartbook, slide 12, and has grouped the states by the 4 tiers we typically refer to:- wave 1, NY tristate (+MA +RI)- wave 2, FL, CA, AZ, TX or F-CAT - wave 3, still facing outbreak states (low prevalence)We have highlighted the 16 states where hospitalizations are rising.  And as you can see, 13 of the 16 are in the states falling in that category of low prevalence, thus, still facing outbreak- Notably, none of the wave 1 and wave 2 states are facing surging hospitalizations. Source: COVID-19 Tracking Project and FundstratThe good news is that hospitalizations are not resulting in the same coefficient of mortality.  In fact, as Dr. Scott Gottlieb points out in the tweet below, death rates are falling across the board.  This is a good development. Source:  3: Positivity rate is creeping up, but at 6.2%, still shows COVID-19 managedThe overall positivity rate in the US is creeping up ever so slightly but is hovering around 6%.  Per the WHO, a positivity rate at 5% is considered a well managed level, because testing is more than adequately detecting cases.  In fact, sub-10% level is considered good.- the waves 1 and 2 peaked at much higher levels- so if wave 3 remains below wave 2 levels, we would view this as testing capacity is keeping and detecting cases Source: COVID-19 Tracking Project and FundstratIt probably makes more sense to look at positivity rates by state.  After all, since testing is local, we can look at which states are managing case spread well.  And as you can see, many states are currently above 10%:- the 21 states are pretty the ones we all know are seeing an outbreak- the outliers are Maine (28.9%) and Florida (11.5%) which are not really seeing case outbreaks- But any states >10% positivity needs to be expanding testingBy contrast, 10 states have positivity rates below 5% and are states where one could say testing infrastructure is helping manage the spread. Source: COVID-19 Tracking Project and Fundstrat  20201021 BLAST COVID 19 UpdateDownload

Other Voices: Why Reading 10K Filings Is Crucial; Part 3

(This report is part of our occasional Other Voices format, as we run across interesting investment ideas or practices from outside our firm. Today’s piece is written by David Zion, founder of the Zion Research Group, an independent research firm focused on accounting and tax issues, and his colleagues Ravi Gomatam and Ben Wechter. This report is excerpted in part from Zion’s annual 10-K Checklist, which includes tricks of the trade, potential red flags, questions to ask and common-sense tips to help you navigate the 10-K filings.) They aren’t fun to read, but SEC documents are crucial to a complete understanding of the company whose shares you are considering.  Buying a stock without reading the 10-K is like driving to an unknown destination without a map.  You can do it, but it’s better with navigation. Zion Research Group is expert at deciphering corporate SEC filings.  To help you navigate this thicket, we are running excerpts from Zion’s reports about 10-Ks. This is the third of three. Footnotes Financial statements are a good place to start your analysis, but you need to dig deeper to make sense out of them and that's where the footnotes come in to provide more context and detail. Remember that when you are going through the footnotes, keep asking yourself if the company's disclosures are clear and in plain English or are they confusing and complex. If a company wants a premium valuation, it needs to provide you with premium disclosures.  The following is what to look for. Significant Accounting Policies:  We’ve started year three of the “Three Great Years of Accounting Changes”. Revenue recognition (2018), leases and hedge accounting (2019), followed by credit losses (2020). As companies get closer to applying a new rule, they should provide better info (i.e., SAB 74 disclosures) about the potential impact. In our view, the biggest impact of an accounting rule change is the potential changes in behavior it can spark. Investors may gain some new insight about the risks, growth and claims on future cash flow, which could change how they view the underlying economics of the business and how they value the company. Corporates might do things differently, too. Watch out for changes in accounting policy... Of course, companies may change how they account for things even when not forced to by the FASB. Pay extra close attention to these types of changes: did the company get more/less aggressive, did they pull closer/farther away from their peers, will their results more/less closely track the underlying economics? Red Flag: Not understanding a footnote after reading it three times. Instead of ignoring accounting rule changes, we’d suggest asking yourself eight questions, The Ocho. (See below.) 1. Does the new rule better reflect the underlying economics? Does that affect how you view the business?  2. What adjustments (if any) do you need to make to your model? Are you looking at minor tweaks or a major rebuild?  3. Were you already factoring this issue into your analysis (e.g., leases)? Does the new rule change your approach?  4. Will non-GAAP numbers change as a result? Will the Street look at the company any differently?  5. Do you need to fix your quant screen so that it’s not sending misleading signals?     6. Does the change make it easier/harder to compare companies both within the U.S and around the world?    7. What changes in corporate behavior do you expect because of the new rule (are those good business decisions or just meant to paint a prettier picture)? Will that change the underlying economics of the business?   8. Are the debt covenants based on frozen GAAP or floating GAAP? If a change in GAAP sparks a covenant default (possible under floating GAAP), would it create an event of default or does it require the covenant to be renegotiated? Below is an abbreviated list of potential footnote items that Zion Research Group recommends that investors study closely.  Space doesn’t allow us to list them in their entirety, but readers can get the full picture at Tax Are today’s low tax rates sustainable? Probably not. How to value NOLs. Post TCJA, the net operating loss (NOL) related tax shield is less valuable due to the lower tax rate. How does the company make money? You need to determine if the revenue recognition pattern matches up with how the company does business with its customers.    Questionable Judgement Calls: New revenue recognition rules provide plenty of room for management judgment which could be used to manage earnings. Do those judgments match the economics of the business?. Financial Instruments When stock prices fall, there’s some accounting consequences. For example, changes in the fair value of equity securities (typically less than 20% stakes) now run through earnings. Foreign Currency FX risk, FX hedging, FX accounting are all complex. Focus on two things (1) impact of FX on business fundamentals and (2) impact of FX on the value of the business. Leases Most leases are now on balance sheet but they might present surprises. Pensions/OPEB When analyzing pensions, take three steps: (1) Health (2) Cost  and (3) Risk. M&A There are lots of games companies can play with purchase accounting. For example, watch out for large chunks of purchase price allocated to goodwill, is that what they are buying or an attempt to make the transaction appear more accretive. Derivatives & Hedging Hedging costs are worth keeping an eye on. Stock Comp Make sure you capture two things in your analysis: (1) options and restricted stock are a claim and (2) future grants are a cost of doing business. Don’t ignore the stock comp cost, especially when management tells you to. Shareholder's Equity Buying back stock to offset earnings dilution is not always a great idea. In theory, companies should buy back stock when it's cheap, but in reality, they tend to buy back the most shares when stock prices are at their highs. EPS There are a few different share counts. If you are looking for the shares outstanding, check the front page of the 10-K. Keep in mind that's not the same as the basic share count, which is the weighted average of the shares outstanding for a period (quarter, year). The company will provide a table that takes you from basic to diluted shares. Inventory  Companies don't disclose too much about inventory nowadays. We'd suggest monitoring the components (raw materials, work-in-process, finished goods). For example, rising finished goods might signal an expected increase in demand or the company is stuck with inventory it can’t sell. PP&E Don't ignore impairment charges. Sure, there's no impact on current period cash flows, but it does reflect management's expectations for lower future cash flows (does that change your expectations?). Prior “Signals”     DateTopicSubject / TickerThe Signal8/19/20Stock10-K Filings Part 2Other Voices: Why Reading 10-K Filings Is Crucial; Part 28/6/20StockTruist Financial (TFC)Never Heard of Truist? This Bank Stock Could Rise Up to 30%7/29/20StockWeight Watchers (WW)Weight Watchers Can Continue to Outperform Post COVID-197/22/20StockXilinx (XLNX)If EPS Rises to Pre-Covid-19 Level, XLNX Could See Old Highs7/15/20StockMarket ConcentrationNarrow Mkt Rally Fuels Worry; We Expect Cyclicals To Join7/8/20StockSEC FilingsOther Voices: Why Reading 10-K Filings Is Crucial; Part 17/1/20StockSimply Good Foods (SMPL)Post-COVID-19, Simply Good Foods Stock Looks Appetizing6/24/20StockLam Research, Applied MaterialsLam Research, Applied Materials Set to Reap IoT Harvest6/17/20StockNordic Semiconductor (Nod. NO)Continued IoT Growth Good News for Nordic Semiconductor6/10/20StockHelmerich & Payne (HP)Helmerich & Payne Stock Could Energize Your Portfolio6/3/20OptionsVan Hulzen Asset ManagementFor Income Seekers, Why Covered Calls Top Junk Bond ETFs5/27/20StockJP Morgan Chase (JPM)Why JPMorgan Chase Belongs in Portfolios Post-COVID-195/20/20StockHorizon (HZNP)Horizon Therapeutics Is Inexpensive; 2 Drugs Show Promise5/13/20StockBank OZK (OZK)‘Plain Vanilla’ Bank OZK Could Be Long Term Opportunity Disclosures This research is for the clients of FS Insight only. For additional information, please contact your sales representative or FS Insight at /. Conflicts of Interest This research contains the views, opinions and recommendations of FS Insight. At the time of publication of this report, FS Insight does not know of, or have reason to know of any material conflicts of interest. General Disclosures FS Insight is an independent research company and is not a registered investment advisor and is not acting as a broker dealer under any federal or state securities laws. FS Insight is a member of IRC Securities’ Research Prime Services Platform. IRC Securities is a FINRA registered broker-dealer that is focused on supporting the independent research industry. Certain personnel of FS Insight (i.e. Research Analysts) are registered representatives of IRC Securities, a FINRA member firm registered as a broker-dealer with the Securities and Exchange Commission and certain state securities regulators. As registered representatives and independent contractors of IRC Securities, such personnel may receive commissions paid to or shared with IRC Securities for transactions placed by FS Insight clients directly with IRC Securities or with securities firms that may share commissions with IRC Securities in accordance with applicable SEC and FINRA requirements. IRC Securities does not distribute the research of FS Insight, which is available to select institutional clients that have engaged FS Insight. As registered representatives of IRC Securities our analysts must follow IRC Securities’ Written Supervisory Procedures. Notable compliance policies include (1) prohibition of insider trading or the facilitation thereof, (2) maintaining client confidentiality, (3) archival of electronic communications, and (4) appropriate use of electronic communications, amongst other compliance related policies. FS Insight does not have the same conflicts that traditional sell-side research organizations have because FS Insight (1) does not conduct any investment banking activities, (2) does not manage any investment funds, and (3) our clients are only institutional investors. This research is for the clients of FS Insight only. Additional information is available upon request. Information has been obtained from sources believed to be reliable, but FS Insight does not warrant its completeness or accuracy except with respect to any disclosures relative to FS Insight and the analyst's involvement (if any) with any of the subject companies of the research. All pricing is as of the market close for the securities discussed, unless otherwise stated. Opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The opinions and recommendations herein do not take into account individual client circumstances, risk tolerance, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies. The recipient of this report must make its own independent decision regarding any securities or financial instruments mentioned herein. Except in circumstances where FS Insight expressly agrees otherwise in writing, FS Insight is not acting as a municipal advisor and the opinions or views contained herein are not intended to be, and do not constitute, advice, including within the meaning of Section 15B of the Securities Exchange Act of 1934. All research reports are disseminated and available to all clients simultaneously through electronic publication to our internal client website, fsinsight. com. Not all research content is redistributed to our clients or made available to third-party aggregators or the media. Please contact your sales representative if you would like to receive any of our research publications. Copyright 2020 FS Insight LLC. All rights reserved. No part of this material may be reprinted, sold or redistributed without the prior written consent of FS Insight LLC.

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