BusinessTN

We believe that stock market investment decisions should be based on a rigorous risk/reward analysis. Because stock prices are dependent on future cash flows, there is no such thing as a "sure thing" in the stock market. Accordingly, the best an investor can do is make sure his investments offer the most upside reward versus downside risk.

There is a lot more "Risk" than "Reward" on this chart, which shows, in general, that we do not see many attractive investment opportunities in Tennessee stocks.

Of particular note are the companies with an Economic vs. Reported EPS Rating of 5. Such a rating means these companies have "Misleading Earnings"—their reported accounting income is positive and rising while their true economic cash flows are negative and declining.

When companies have Misleading Earnings and Expensive Valuations (as measured by the Valuation Metrics), they qualify for our Most Dangerous Stocks list. On the other hand, companies that make our Most Attractive Stocks list have strong economic cash flows and cheap valuations as measured by the criteria above.

top findings

NHC

Only one Wall Street Rating is a Strong Buy on NHC as recently as January. That rating moved to a "Hold" in February. Their analysis probably overlooks the $366 of off-balance sheet debt carried by the company. Note that NHC's off-balance sheet debt is over 50% of its market value. This stock is much riskier than anyone realizes before they read the Notes to the Financial Statements.

GET

10 out of the 11 Wall Street firms that cover GET have Buy or Strong-Buy ratings. The other rating is a Hold. Those analysts are likely missing the fact that even though GET reported that its earnings rose by nearly $200 million last year, their true economic earnings actually declined by $47 million. What's more, our analysis shows that GET's management has a very poor record in making capital allocation decisions. Over the past 10 years, management has written off over $230 million of its balance sheet, which equates to 10 cents on every dollar of investment it has made. This means the company is throwing away $10 for every $100 of shareholder value. Management has a long way to go to overcome these losses before it can create value for shareholders.

CXW

All five Wall Street firms that cover CXW have Buy or Strong Buy ratings. Four of them have Strong Buy ratings. Over the past 10 years, management has written off over $734 million of its balance sheet, which equates to 33 cents on every dollar of investment it has made. It is well known that this company is engaged in turnaround. However, investors looking to profit from a rapid turnaround in the business may have to wait a long, long time, given that such turnaround has yet to manifest in the economics of the business and that the current stock market valuation already implies that the company's profits will increase by 250% next year. Accordingly, as our Risk/Reward Rating shows, CXW offers investors too much downside risk compared to very little upside potential.

DK

Four of the seven Wall Street firms that cover DK have a Hold or Sell Rating. Once sentiment shifts toward the negative, Wall Street firms tend to throw the baby out with the bath water and downgrade for fear of being the last analyst on the Street to warn their institutional clients about a bad stock. Because Wall Street research analysts tend to move in packs, they often overlook key details. For example, DK's current market valuation implies the company's profits will permanently decline by 70% and the company will never grow profits from that depressed level. At the same time, our economic earnings analysis reveals that DK's economic earnings rose by $9.7 million versus an increase in accounting income of only $3.4 million. Risk/Reward is Very Attractive for DK because DK's valuation already implies a permanent 70% decline in the company's profits and our analysis reveals that profits are actually rising.

RT

Nine of the 11 Wall Street analysts have a Hold or Under-perform Rating on RT. Most of those analysts likely blame the decline in reported earnings last year and poor prospects for their negative opinions. They are not aware that economic earnings actually rose by $15.6 million. (Net income fell by $9.3 million.) These different results are caused by excluding non-operating expenses and charges from our assessment of the ongoing operations of the business. As for the poor prospects, we believe the markets' valuation is already pricing in a virtually worst-case scenario as the current stock price implies the company's profits will permanently decline by 50% and the company will never grow profits from that depressed level. Accordingly, our Risk/Reward analysis reveals that downside risk is limited, given that the market is already forecasting a permanent 50% decline in profits. Reward is strong given that the economic profits of the company are rising despite reported numbers that do not show it. —D.T.