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Learn how to find and invest in undervalued stocks from the market insider that MSN Money’s Michael Brush calls one of his “favorite value managers for the past decade.”, George Putnam III.

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George Putnam
August 15, 2019

Excuse du Jour: The Dog Ate My Earnings


Remember back in grade school when you didn't do your homework, and you had to come up with a good excuse for the teacher'? You probably didn't realize that you were honing a skill that is very useful for the CEO's and CFO's of public companies. When was the last time you heard a chief executive say, "We lost money this quarter because I screwed up?" Or even, "'We missed our targets because our strategy was poor?"


Based on our informal observations of earnings reports, the number one excuse for corporate executives is the weather. It seems as though whenever a company reports poor results, management says it was "because the weather was unusually __" This is a particularly useful excuse for a variety of reasons. Of course, you can never hold management responsible for the weather. And it is a very versatile excuse. It can be too warm if you are selling cold weather gear; or too cold if you are selling summer stuff: and rain, snow and other natural phenomena can always be blamed for keeping people away from your business locations. The weather is especially handy if you have a national or global business because you can always find someplace where the weather did not cooperate last quarter. Anyone want to place a bet on how many upcoming quarterly reports will blame hurricanes?


After the weather, the economy seems to be a close second. You don't often hear companies claim the economy was too strong, but otherwise it can cover a multitude of sins. Economic excuses take a variety of forms: "'sluggish consumer spending," "high raw material costs," etc.


From an investor's point of view, you have to try to distinguish between a valid reason for temporary underperformance and an excuse designed to hide poor strategy, poor execution or a just plain lousy business. For example, a business that has many locations in Florida might be justified in saying that its results were adversely affected this quarter by the unusual rash of hurricanes. However, we would be skeptical of businesses based in other parts of the country that blame the weather for poor earnings.


If you determine that the reason is valid, you then must decide whether it is a temporary phenomenon - which may indicate an investment opportunity - or a long-term trend. For example, the hurricane effect is likely to be temporary, while higher raw material costs could be either temporary or permanent. What you want to find, of course, are phenomena that are temporary but that have nonetheless depressed the stock price.


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