BusinessTN

David Trainer launched Brentwood-based stock research firm New Constructs in 2003. Since then, the company has collected several accolades for stock picking. Institutional Investor magazine once highlighted New Constructs as the No. 1-ranked research firm for stock picking over a prior four-year period. That ranking included the small independent research firms as well as the Wall Street sell-side firms.

New Constructs eschews company press releases and Wall Street research reports, most of which tend to focus on accounting earnings, and devotes its efforts instead to actually reading or "scrubbing" the reports that companies submit to the Securities and Exchange Commission. Once New Constructs gets its hands on those reports, it parses all relevant financial data to understand the true profitability of the company.

Once again this year, as part of BusinessTN's annual TN250 coverage, New Constructs has provided its research on the Tennessee public companies it covers. Company snapshots combine five equally weighted criteria: economic versus reported earnings per share (EPS), return on invested capital ranked by quintile, two-year average free cash flow yield, price-to-economic book value ratio, and the market-implied growth appreciation period (GAP). The results are used to construct a risk/reward investment rating for each company. In this system, companies are ranked "1" through "5" as either "very attractive" (1), "attractive" (2), "neutral" (3), "dangerous" (4) or "very dangerous" (5). Each individual criterion is ranked 1 through 5 against the performance of more than 3,000 companies. These rankings identify disconnects between the market's expectations for future cash flows and current cash flows. A very dangerous company, then, has poor economic profits versus misleading accounting profits that exaggerate earnings. This has the potential to artificially increase stock valuation. A very attractive company, on the other hand, has a cheap valuation with strong economic profits, suggestive of a hidden value the market has failed to recognize.

The accompanying chart depicts New Constructs' findings for 50 publicly traded Tennessee companies it scrubs, along with some notes from Trainer himself. (Note: this analysis took place in early May.)
(Disclosure: New Constructs has received funding from several Tennessee investors, including Solidus Co., an investor in the company that publishes BusinessTN.)