Courtesy of Sabrient Systems and Gradient Analytics
We’re coming down to the final sleepy weeks of a relatively uneventful summer in the equity markets. Volume is quite low, as is expected this time of year with investment managers in vacation mode. Nevertheless, the S&P 500 has now recovered all of its losses since the “Sell-in-May” crowd hit the market hard, sending the S&P 500 falling 9% from a close of 1406 on May 1 to 1278 on June 1. Since then, stocks have steadily climbed in the face of frightening global headlines within a clearly-defined bullish rising channel.
On Wednesday, the S&P 500 closed at 1405.53 to challenge technical resistance at that May 1 high. Bulls have been valiantly shoring up intraday weakness each day to ensure markets hold their psychologically important support levels of Dow 13,000, Nasdaq 3,000, S&P 500 1400, and Russell 2000 800.
Curiously, the selection of Congressman Paul Ryan as Mitt Romney’s running mate has served to re-energize both parties, which I think has been bullish for the markets. Republicans feel that he enhances Mitt Romney’s conservative stripes while adding a poised, rational, intelligent, and engaging personality to the ticket, while Democrats believe that his budget proposals have been so radical that it will make re-election easier for the incumbents. So, everyone has been given a dose of optimism.
Overall, corporate revenues have been struggling to grow year-over-year, while earnings growth has been more robust as costs have been cut to the bone and productivity continues to improve. In this slow-growth world, it is particularly important for investors to take a hard look at the aggressiveness of a company’s accounting practices.
On this topic, I have pointed out periodically that Sabrient subsidiary Gradient Analytics, which produces in-depth forensic accounting research, has been particularly successful at rooting out firms with questionable earnings quality and revenue-recognition practices by examining trends in things like accruals, receivables, payables, inventories, cash flow, margins, allowance for doubtful accounts, pension liabilities, effective tax rates, etc., as well as anomalous insider trading behavior (particularly with their equity incentives and SEC Rule 10b5-1 plans).
This is more important than ever these days. Indeed, many of Gradient’s negatively-rated stocks have fallen recently after their earnings reports, including Ritchie Bros (RBA), comScore (SCOR), FARO Technologies (FARO), and Innophos Holdings (IPHS). Moreover, a growing number of Chinese companies…
