This report went out to clients last week.
Suspicious Overearners: This model seeks companies that are potentially “over-earning”, defined as companies with unusually high margins relative to their own history or relative to the industry.
This week we feature overearning short candidates: Dick’s (DKS), Nucor (NUE), Atkore (ATKR), HCA Hlth (HCA), Danaher (DHR), and Calif Water Svc (CWT).
Margin over-earners are fertile hunting ground for shorts if the reasons for the margin increase are either unsustainable or fraudulent. In addition to margin sustainability, a critical judgement involves to what extent unsustainable margins are embedded in a company’s forecasts.
These shorts tend to have moderate to higher betas, higher valuations due to recent strong results and good short responses to subsequently disappointing earnings.
Click here for the report.
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