Archive for the ‘General’ category

Protected: What Makes Stock Sense

August 23rd, 2011

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GM- Its True Credit Rating and Financial Health

August 23rd, 2011

Report available to paid subscribers

Higher Level of Service To Be Available on Credit Trends

August 10th, 2011


Starting September 1, we will be offering a higher level of service on a yearly payment basis. Clients of CT Capital LLC will be granted access.

Each week, we will be highlighting a company or companies presenting risks and reward, which the investing public, and even perhaps these firms own Board of Directors, may not be aware or are underestimating. Everything from financial engineering to taxes. Any risk which could potentially impact a firm’s cost of capital, which we define as risk to prospective free cash flows, is considered.

Special reports will be written as well, covering both broad areas of the equity market as well as recent news items.

For subscribers prior to September 1, the cost is $ 2,500 per year. After September 1, the cost will rise to $ 5,000 per calendar year.

The reports, covering both cash flows and credit, and will be based on the principles outlined in “Security Valuation and Risk Analysis.”

To subscribe, email us.


Kenneth S. Hackel, CFA


Learn To Analyze Companies Better-

July 27th, 2011

You’d be foolish to rely on others when you can do a much better, detailed job yourself.

With the book to your right, you’ll be able to uncover risks your brokerage firm or investment advisor is not aware of.

You’ll see why their analysis, in many cases, has been way off base. You will learn how to make the proper adjustments to the published financial statements and footnoted items, and other analysis your current adviser is not performing.

Relying on a firm’s financial statements presents risks. Companies can manipulate many activities and payments, to present themselves in a light which may not represent the true picture of cash flows and credit.

By following the methods outlined in the text you will be placed in a superior position-the result of my nearly four decades covering all phases of finance-from investment advisory, research director,  to fairness opinions. See how I took over the worst performing equity mutual fund for a year and made it the leading fund.

Wonder no more why a particular stock is falling without seeming reason, or which stocks present superior potential.

Buy “Security Valuation and Risk Analysis”.

Is your investment advisor worth a hill of beans?

July 13th, 2011

How to tell if the investment advisor or security analyst you speak to is “worth a hill of beans.”


Ask the following 3 questions:


1-Explain, in detail, once you’ve estimated the entity’s free cash flows, how you arrive at the discount rate?

HINT: It’s not what you learned in grad school or the CFA exam.


2-Explain, again in detail, all of the adjustments you make to the published financial statements, to arrive at an estimate of free cash flow?

HINT: Lots of adjustments are required.


3-How do you define return on invested capital?

HINT: We’re looking for cash on cash.



For the real answers, see “Security Valuation and Risk Analysis” or call CT Capital LLC

Stability-Based Portfolio

July 9th, 2011


You may have recently become aware of several new investment products based on portfolio stability factors. If you are interested in an equity portfolio composed of firms, which, by their nature, exhibit considerable financial stability, you should surely be attracted to CT Capital LLC. This is an area we have focused on for almost four decades.

Operating and financial stability have always been critical to risk analysis and investment performance, as well as how firms themselves should be managed, including capital deployment and financial structure.

Whereas the stability products that have been introduced by other firms are keyed off of quite basic metrics, the CT Capital LLC portfolio is based on a comprehensive array of detailed models that do not exist elsewhere. Our worksheets utilize both historical and real time data.

For example, a recently introduced product from a well-known firm uses balance sheet debt/equity as a stability measure whereas we include all forms of debt in our leverage ratios, including unhedged derivatives, unfunded pensions using real time assumptions, leases built in for growth (not the footnoted minimum amount), moral obligations, realism behind health care assumptions, workers compensation, purchase agreements, self-insurance, and so on. Other firms are using GAAP data; we use cash flow, and, where appropriate, normalized (smoothed) results. Our cash flow models adjust for firms which might have “managed” their assets to produce cash which, if not been managed, would have reported poor cash flows. This would include balance sheet and credit decisions geared to producing short-term cash when the financial structure is weakening as might be the risk of growth to prospective free cash flows.

We incorporate stability measures in everything we do, from sales and input costs to taxes (both effective and actual).

We evaluate and measure sovereign risk, insurance, litigation, patents, covenants, and any and all factors which might lead to a change in the firm’s stability. This, in fact, forms the basis of our cost of equity capital.

Half of our analysis is dedicated to cost of capital as it is the most important factor in risk analysis. Cost of capital and stability go hand and hand.

If you are an institutional investor, call us at CT Capital LLC and we will explain how a true stability led portfolio should be constructed.



Kenneth S. Hackel, CFA


When an Active (over Passive ) Investment Strategy Makes Sense

July 5th, 2011

Arguing for a Active Investment Strategy
A recent study by Peter Mladina, Director of Research of Waterline Partners, which advocated the taxable investor own primary passively managed equities and other passive investments, is not without flaws.

The author concluded an active manager needed to show outperformance of 380 basis points (his “triple net” alpha) over a passive strategy to essentially break even in terms of similar after-tax return.

I have found most active strategies fail due to a misjudgment of risk (cost of equity capital) and incorrect definition of free cash flow. In this case a passive strategy is preferable. However, with more precise calculations of these variables sustained outperformance can be achieved.

I see little to nothing new in the paper’s general conclusions. A passive strategy, of course, works in general, as the universe cannot outperform itself when fees and other costs of an active strategy are deducted. There are other advantages of the passive strategy mentioned at the conclusion of this response. Of course, the paper is based on historical and normal results, which may be at odds with prospective happenings.

Major Reasons for Active Manager Underperformance
Security analysts, in general, do not understand-let alone quantify- the deep and often buried list of risks firms confront. A thorough insight into risk forms the basis of the discounting mechanism (cost of equity capital). A lack of awareness of these “hidden” risks (i.e. Moral obligations, derivatives, mergers or other business combinations, financial structure, pension and other benefits, taxes…) forces a valuation that is not consistent with, nor reflect the true valuation of the entity. My response here is not meant to be too great an advertisement for CT Capital but our detailed evaluation of risk as a key factor in what I believe will lead to outperformance vs. benchmarks and other active managers. I would encourage you to ask security analysts, equity managers and other investors and consultants how they arrive at the discount rate, and what they believe it is meant to capture (correct answer: risk to prospective free cash flows).

Most security analysts, investors, corporate finance analysts, and investment bankers do not understand how to measure free cash flow. I have worked all sides of corporate finance and investment advisory, and by failing to account for, including proper (re)classification and adjustment of items in the statement of cash flows, income statement, and footnotes, outperformance can only take place through luck, and I do not believe in luck as a fitting methodology outside the casino. The free cash flows are the income to the investor and its yield forms the basis of metrics used in capital decisions, including the margin of safety between the cost of capital.

So, if risk and free cash flows are not properly measured, a passive strategy makes sense. Ask yourself, what makes Warren Buffet so smart? The answer is simple: he buys assets that meet the above criteria, even though even he sometimes gets off the beaten track with regard to risk.

Back to the Paper…
I find fault with several of the assumptions in the paper. For example, the author’s “required triple net-alpha,” is derived thru a backed-into calculation after other variables are known. Unfortunately, those variables are at odds with the costs and expenses available to most large investors. Building upon the 7.77%, (which he uses as the average historical return) across the board does not recognize these more realistic assumptions and thus throws off the remaining calculations that differ with the passive strategy returns.
Let me also point out even an active strategy of a diversified portfolio based on ETF’s finds expenses much closer to the passive strategy expense other ratios’.

In some ways the author’s entire argument is circular as it assumed a manager would need to outperform by 380 basis points in order to make up for active management costs. However, those higher costs are a result of taking advantage of opportunities that a passive fund cannot (e.g. managers do not trade more for the sake of racking up higher commissions but because they believe they have superior information).

The 1.35% expense ratio, 0.89% in transaction costs, and 94% turnover, are over three times that at CT Capital LLC, as we trade at 1 cent per share with moderate turnover. I believe all three estimates are considerably higher than necessary to achieve outperformance. Mutual funds that incur research costs via commissions often do pay the higher fees quoted by the author, however this is an unnecessary expense avoided by investment advisors who use their own research teams and models. The author also quoted studies that were themselves faulty.

Regarding the tax assumption, as investment advisors tend to hold their unrealized gains over longer holding periods than realized losses, this assumption is also exaggerated.
Also, the 7.77% result used as the basis, is the return before transaction costs. I have not seen advisors report this way, although I understand what the author is trying to get at-the added return over passive- in actuality, it is unrealistic.

When adopting more practical expense, transaction costs, and tax assumptions, for a moderately trading investment manager, the triple net alpha is cut to about 73% less than the author’s ’ 380 basis point triple net alpha, or 1.03%. An investment manager in equities that can consistently outperform by this magnitude would be roughly equivalent to the author’s passive results. To believe a gross annual 380 basis point return is required over a passive strategy is unrealistic and not supported by fact and reality existing in the marketplace. I have recently seen active managers charge very low fees, not to distant from passive fees, for ultra large accounts. With worldwide economic growth slow, it is in this direction fees and expenses are headed. Actuarial assumptions have rarely been met over the past decade, and cost reduction is the preferred solution.

The passive strategy will make sense for a long time to come, although the quoted required gap (triple net) is exaggerated. Faulty security analysts, the large benchmark indexes being of considerably higher quality than the equity market as a whole, the taking of undue risks by the investment manager universe, and the identity of the whole not being greater than itself, are the reasons. On the other hand, active fees and expenses are incontrovertibly headed down and will soon provide stronger competition with passive products, including ETFs and indexing.

Unquestionably, a clandestine reason for the growth of indexed products has been the guidance and education of security analysts. Historically, except for perhaps the CFA program, which even itself is lacking, analyst training is constituted more of on-the job instruction than what is really needed, but admittedly impossible to pull off-that of on the job training at various firms in the industries covered by said analysts.

However, if investment consultants, pension sponsors, financial journalists and other advisory firms find the superior analyst and process, extreme value will be provided over the passive strategy. I have seen firsthand, over four decades, how an active strategy can earn returns many times that of a passive strategy, taking into account the greater fee and tax effects.

A Sensible Definition of a “Bear” Market

June 19th, 2011

A bear market is generally defined as a decline in a widely followed stock index, such as the Dow Jones Industrials or the S&P 500 index, over a greater than 2 month period, by 20% or greater from its most recent high price.

This definition, however, ignores the important valuation component, and as such, must be viewed as faulty, simplistic and perhaps even naive.

For example, a share of stock which previously sold at a hundred times free cash flow, meaning its owners can expect to receive no greater than a 1% return on their investment, declining in value so it now sells at 80 times its free cash flow ( or 1.25% yield), would meet the simple, but generally accepted bear market hurdle.

But should this firm now yielding 1.25% (or less, if it doesn’t generate free cash at all), be considered to be in bear market territory merely because its stock now reflects reality rather than a previously exaggerated valuation.

All we need to do is take a look at the late 1990’s, when technology stocks frequently sold at greater than 100 times their revenues, to say nothing about the return investors could expect .

Bringing it down to the individual security level, you might recall JDS Uniphase, which during that time sold at over $1100 a share, split adjusted.  Could one rationally posit when its stock fell to $880, it placed the security in “cheap” territory,” or more realistically, simply less ridiculous? When viewed this way it is obvious one should look toward valuation aside from drop in value. If so, JDSU would not have reached bear market territory until it dropped to below $10 per share, given it produced negligible amounts of free cash flow during 1997-1999.

Common sense would mandate market pundits should consider not only a fall in the price of a security but also whether the prior valuation made sense in the first place. While we all like simplicity, the connotation of a bear market is the value of an asset has dropped to an unfairly low level given undue pessimism. But if the current valuation level were indeed somewhat fair, one should hardly consider the price to be that of a bear market value.

Implicit in my thinking is there is a fair and reasonable judgment as to fair value, and one which I am comfortable offering a solution, which is as follows:

A bear market occurs when the value of a large grouping  of equity securities, believed to be reflective of the general economy both falls in value by 15% and has a free cash flow yield of twice that of the 10 year treasury yield, based on the firms normalized free cash flows.

Using this definition, the last bear market would have been declared on February 6, 2008, not June 27, or almost 5 months sooner than recognized. This could have allowed congress and the treasury to perhaps save many tens of thousands of jobs, and investors and creditors much grief.

The exception to my 2x treasury yield definition would be during periods of hyper inflation, during which time less than a doubling would be necessitated to trigger a bear market; a sliding  scale that would work its way from 2x up until a 10% yield to just 10% greater should the treasury yield approach 15%. Thankfully, in the U.S. at least, such instances are extremely rare, having been there just once.   As seen in the following 130 year chart, the only period when 10 year yields pushed over 5% resulted from the oil embargos impact on the general price level and wages. Thus, a required 10% free cash flow yield would likewise be rare.

While many would suppose the distinction between the suggested and generally accepted definitions are inconsequential, it is not borne in reality.  And for stock market historians, investment strategists, investors, and yes, politicians, the need to know if a bear market exists is important in everything from asset allocation to policy.

So, given my suggested definition, where would the S&P 500 need to fall to enter bear market territory, and how would that differ from the generally accepted definition?

The S&P 500 began its current bull market in March 2009 and reached its most recent closing high on May 2 at 1361.22. A 20% decline would therefore take that index to bear market territory at 1088.97, or a little over 14% from yesterday’s close of 1267.64. Stocks dropping to that level would, in my estimation, be well into, not at the cusp of, a bear market.

Ten year treasuries currently yield 2.93%. The S&P 500 currently has a normalized free cash flow yield of 5.22% ( or a 19.15 multiple), which includes both corporate overspending and misclassification errors, such as taxes, payments to non-controlling interests, payments on guarantees, factoring, underfunding pension, and the like.  If the free cash flow yield on the S&P 500 were to provide a return twice that of treasuries, stocks would need to yield 5.86% or treasury yields would need to fall. Stocks would therefore need to decline another 10.9%, given their current free cash flow yield and the requirement to permeate the 15% barrier. This combination is considerably smaller than today’s thinking would have it, as generally recognized by the simple 20% definition, and is due to the spread between the treasury rate and the free cash flow yield. In other instances, the barrier might be considerably larger or smaller than the naive bear market definition.

Intuitively, I believe most investors would agree another almost 11% fall in the general level of equity prices would constitute a bear market, not 30% greater than that. And in this case, their perception would be correct, as would be borne out from the fundamental underpinning of equity investing-a firm is worth the present value of its free cash flows. In conjunction with a severe drop in stock values, these two metrics form the basis.


Kenneth S. Hackel, CFA


To learn in-depth cash flow analysis and risk (cost of capital), please see Security Valuation and Risk Analysis

Corporate Cash….All that Glitters

June 7th, 2011

All that Glitters……..


A recent report out of McKinsey in Co.(McKinsey Quarterly, May 2011) stated European and U.S. companies hold excess cash on the order of $2 trillion. The general point of the article is how companies’ should begin paying back its shareholders given the large excess funds they both hold and will continue to produce.

I find McKinsey’s arguments to be both an exaggeration and misleading for the following reasons:

1- The cash does not account for funds held in geographies which, if pulled would result in a large tax, in perhaps two countries. In fact, certain countries would not permit such payments at all.

2- It does not account for needed working capital

3-It does not account for debt due

4- It does not take into account funds needed for expansion, or business combinations, R&D, or additional hiring.

5- The desire to hold excess cash may be needed for other obligations, such as pensions, employee buyouts due to restructuring, commitments, or guarantees, both legal and moral.

6- The authors do not explain why firms must distribute cash back at all, even if several years have passed awaiting opportunities. Capital gains has always proved the better after-tax reward.

7-The authors defined excess cash as the amount of cash outstanding over and above operating cash, which is defined at 2 percent of revenue. This is clearly a poor definition of excess cash.


What the article does correctly point out, however, is the net effect on the firm value of share repurchases is zero. This is a subject I have long ago pointed out. Share buybacks improve accounting metrics, but do nothing to improve ROIC.


My point is the amount of excess cash is not nearly that amount claimed. I strongly believe a secondary reason for the US economy and stock market free-fall just a few short years ago were the massive buy-backs, which, by eating up capital, only served to deepen the credit crisis while driving some pretty large institutions out of business. I believe shareholders would have earned greater than 3% over the past five years had companies acted more prudently, and invested in assets and projects earning a safe spread between ROIC and cost of capital than depleting cash and equity.


Buybacks have not proved to be a “reward” to shareholders, as managers and too many investors and stock analysts, claim the programs to be.


For more information on this subject, contact Kenneth Hackel or consult “Security Valuation and Risk Analysis.”


Change To Risk Free Rate Security to Have Profound and Immediate Impact on Valuations

June 6th, 2011


The most implicit building block of security and company valuation is use of the risk free rate.

Whether undergoing a fairness opinion, a discounted cash flow model, or any number of other on-going concern valuation estimates, the starting point is the rate attainable with an investment in a risk-free security. It is the initial yield from which other elements of risk are added to arrive at the cost of equity capital. Simply stated, the higher (lower) the cost of equity, the lower (higher) the fair price investors would be willing to pay, given a set level of free cash flows.

Since the formulation of the capital asset pricing model, the risk free rate used has been the US government bond.

At CT Capital LLC, we use the 10 year Treasury bond, as that security best matches long-term asset programs, whether they be the building of a factory or a merger partner, from which a return on that invested capital is demanded.

Of late, as talk has gathered momentum, led by House Majority leader Eric Cantor, that politicians are willing to allow the U.S. to default on its obligations, analysts must now carefully appraise whether a defaulted security is, in the truest sense, a risk-free instrument.

One must conclude, even if a limited duration default were to occur, the answer would be no, and would be even more undeniable if seconded by a downgrade by a major credit rating agency, as Moody’s has threatened last week. Standard & Poor’s also downgraded its outlook for the U.S., citing “very large budget deficits and rising indebtedness…”

For this reason, should the U.S. Congress not come to its senses, CT Capital LLC will, if, due to QE2 or other Fed intervention, the 10 year Treasury bond not reflect economic reality, utilize an additional penalty being the cost of a credit default swap, currently 53 basis points. Thus, a current risk-free rate 10 year Treasury bond yielding 3% would in effect be raised to a 3.53% risk free rate.

Another alternative would be utilizing the 10 year rate on a liquid AAA corporates, currently 3.42%. However, even a basket of the cash instruments could present liquidity constraints and thus may not, for the time being, present a realistic alternative compared to the $9.7 trillion of U.S. debt in the hands of the public.

The brunt of a raise in the risk free rate is to force lower valuation multiples for the equity market in general, as would always be the case when the cost of capital rises. Investors demand a higher return for committing their risk-based capital as prospective free cash flows are attached to greater uncertainty reflective of the new higher rate.

Even if U.S. Government securities were to escape a default and credit downgrade in August, the tea leaves indicate it remains a matter of time before that inevitability occurs.


And when that time comes, investors, company stock analysts, and buyers and sellers of businesses, would feel a swift and powerful jolt to their reward expectations, as pronounced by the cost of equity beginning with that new risk free rate of interest.  And they will act and invest accordingly.




Kenneth S. Hackel, CFA


Google Inc. -Security Analysts and Many Investors Show Their Mettle-Tin!

June 2nd, 2011

Tin, while not ranking as high as mercury, is still a weak metal. And many investors continue to exhibit its malleability, over-reacting to a single quarter’s financial results, even for firms which have growing cash flows, have added value during the quarter, and possess strong financial structure and flexibility.

Investors must understand that firms do not operate with the smoothness of a well-crafted tool. They are not machines- yet enterprises that are well managed will continue to build value, even during periods when planning, rather than providing actual results, take place. For example, smart managers acquire during recessions, and aren’t afraid to do so, a time when weak firms are forced to sell assets.

This leads me to Google.

Google disappointed investors during its first quarter due to a perceived lack of financial discipline, as operating expenses rose over twice as fast as its 27% revenue growth; the company hired over 1900 new employees, handed out large salary raises while boosting other discretionary expenses, especially marketing. While GAAP based income disappointed, normalized free cash flow growth clearly exceeded our model’s metrics. Revenues represent a lofty model weighting as discretionary expenses can typically be controlled, while product acceptance reflects the quality of and demand for the product or service. This is not to downplay expense control, as efficiencies including improvements to supply chain and other direct expenditures have the same effect as boosting cash flows and hence, market valuation. Clearly, Google’s products are being very well received in the marketplace with collections from customer receivables growing at a near 24% rate.

With Google selling at 6.1% yield on enterprise value, we view its stock quite appealing, and can point to any number of lower quality companies selling at considerably higher valuations. Although Google shares are currently fair valued at $604 a share, that estimate would jump if managers keep expenses and margins in line and revenues grow as expected.

Obviously, if Google needs to continue to write $500MM checks to settle lawsuits, its fair value will fall and cost of capital will rise. However, its very strong and predictable near-term free cash flows can fight off these legal issues assuming they can indeed be put to an an end. Given the sensitivity analysis below, using our free cash flow model (please refer to Security Valuation and Risk Analysis), current fair value for Google is sufficiently above its current price. The 18.5% tax on repatriation represents the company’s five year average cash tax rate, based on Google’s net cash of $32 billion.


Google Fair Value Sensitivity Using CT Capital Free Cash Flow Model

Disc Rte. Probability FV

7% 10% $732.04

8% 10% $642.04

8.25% 10% $621.91

8.50% 15% $602.64

8.75% 20% $584.18

9.00% 20% $566.49

10.00% 15% $502.76



Fair Value Cash Flow 100% $595.54

Net Cash/Debt* 8.1

Fair Value Per Share $603.64

*includes tax on repatriation and working capital



Note: Google shares are held by clients of CT Capital LLC.



Large Share Buybacks Again Prove They Are Misguided

May 27th, 2011


Large Share Buybacks Again Prove They Are Misguided


As if we needed additional evidence large share buybacks are almost always a waste of corporate resources , I present a list of all companies having current market values of greater than $500MM that have repurchased at least 15% of their current market values and placed into treasury. As seen, the list includes many well known firms, including several that have bought back over 50% of their current market values. The average of these large firms have repurchased an astounding 36% of their current market value – yet, as opposed to their helping their shareholders-they have done the opposite-as their stocks have underperformed the return on the S&P 500!

As seen, stock buybacks have proved no refuge in a flat and falling equity market. The latest example is the current year, as the current quarter to date, with the S&P slipping 36 basis points thru last night’s close, the average of these firms has seen its stock fall by 52 basis points. Care for a longer time horizon?

For the past 5 years, the names on the list have returned 2.4% versus a return on the S&P 500 of 3.77%. To make matters worse, the list excludes those bankrupt or merged firms which repurchased large amounts of their own shares prior to their demise such as Bear Stearns, Lehman, and many, many others.

For the current quarter, Big Lots, Brunswick, Ferro,, Lamar Advertising, , Lenox Int’l, , Lexmark, Terex, Timberland have each fallen by greater than 20% this quarter.

I am not implying these firms will meet the same fate as Lehman, but rather time has proven again and again share repurchases, other than to perhaps offset stock based compensation, do not improve the lots of shareholders or bondholders. And for sound economic reason.

Share buybacks, like dividends must be rubber-stamped by Boards of Directors. They should understand that share repurchases, despite improving GAAP-based metrics do nothing to improve cash based return on invested capital.  On the contrary, by altering the financial structure, it often raises risk and hence, the cost of capital to the firm whose value they are entrusted to enhance. Value is created by adding to the capital base, joint ventures, increasing revenues, and by running the firm more efficiently-not by shrinking the equity cushion.

One lot whose fortunes share buybacks does improve are high paid executives whose bonuses and stock options are often based on GAAP accounting.

Warren Buffet recognizes this, and has never bought back a share of Berkshire. Adding to the capital base assets whose cash based return is safely and consistently above ROIC is a proven method for share outperformance over the long-term.

While part of the problem lies with shareholders themselves, as they continue to believe share buybacks “support the stock”, history has again clearly shown otherwise.

For a detailed example on why share buybacks do not increase ROIC, please contact CT Capital LLC and see “Security Valuation and Risk Analysis.”


Company Name Ticker Symbol Treasury Stock ($M) Current Market Value ($M) % of Current Market Value in Treasury Total Return-Year to Date Total Return-Qtr to Date 5-Year Total Return
3M CO MMM 10,266 65,721 15.6% 8.4 (0.5) 5.4
ACI WORLDWIDE INC ACIW 172 1,031 16.6% 14.8 (5.9) (3.7)
ACTIVISION BLIZZARD INC ATVI 2,194 13,124 16.7% (6.4) 4.6  
ADOBE SYSTEMS INC ADBE 3,264 17,369 18.8% 11.9 3.8 (3.1)
ADVANCE AUTO PARTS INC AAP 1,029 4,904 21.0% (4.7) (4.0) 10.9
AFLAC INC AFL 5,386 22,833 23.6% (12.5) (7.0) 5.6
AGILENT TECHNOLOGIES INC A 8,038 16,945 47.4% 18.5 9.6 6.7
ALCATEL-LUCENT -ADR ALU 2,078 13,029 15.9% 89.9 (3.3) (14.1)
ALCOA INC AA 4,146 16,964 24.4% 4.2 (9.4) (10.9)
ALLIANCE DATA SYSTEMS CORP ADS 2,080 4,529 45.9% 25.0 3.4 11.6
ALLSTATE CORP ALL 15,910 16,409 97.0% (0.8) (1.1) (7.0)
ALTRIA GROUP INC MO 23,469 58,301 40.3% 14.8 7.0 16.7
AMDOCS LTD DOX 1,309 5,570 23.5% 9.2 4.0 (3.7)
AMERCO UHAL 526 1,694 31.0% (10.0) (10.9) (0.5)
AMERICAN TOWER CORP AMT 3,382 21,081 16.0% 2.9 2.6 8.9
AMERIPRISE FINANCIAL INC AMP 2,620 14,782 17.7% 6.7 0.3 6.6
AMERISOURCEBERGEN CORP ABC 4,373 11,328 38.6% 21.9 4.8 15.1
AMERN EAGLE OUTFITTERS INC AEO 938 2,635 35.6% (6.9) (14.9) (3.5)
AMR CORP/DE AMR 367 2,184 16.8% (15.9) 1.4 (24.9)
AMTRUST FINANCIAL SERVICES AFSI 300 1,259 23.9% 21.1 10.7  
ANN INC ANN 864 1,472 58.7% 3.7 (2.4) (3.5)
APOLLO GROUP INC  -CL A APOL 2,408 5,649 42.6% 1.4 (4.0) (6.0)
APPLIED MATERIALS INC AMAT 9,396 18,195 51.6% (1.4) (11.7) (1.0)
ASSURANT INC AIZ 1,764 3,620 48.7% (1.8) (2.1) (2.4)
ASTORIA FINANCIAL CORP AF 1,431 1,391 102.8% 3.4 (0.8) (10.5)
AUTOMATIC DATA PROCESSING ADP 6,540 26,694 24.5% 16.2 4.1 9.4
AVERY DENNISON CORP AVY 831 4,380 19.0% (2.6) (2.3) (4.8)
AVIS BUDGET GROUP INC CAR 5,874 1,765 332.8% 8.0 (6.1) (3.4)
AVON PRODUCTS AVP 4,559 12,785 35.7% 3.9 10.7 0.6
AXIS CAPITAL HOLDINGS LTD AXS 1,381 4,207 32.8% (8.8) (6.9) 6.0
BALL CORP BLL 2,123 6,492 32.7% 13.8 7.8 14.3
BANK OF HAWAII CORP BOH 450 2,263 19.9% 1.5 (0.8) 1.6
BAXTER INTERNATIONAL INC BAX 5,655 33,681 16.8% 17.3 9.8 10.6
BECTON DICKINSON & CO BDX 4,806 19,134 25.1% 4.0 9.9 8.2
BED BATH & BEYOND INC BBBY 2,814 13,426 21.0% 9.2 11.2 7.9
BEMIS CO INC BMS 544 3,448 15.8% 1.7 0.5 3.0
BERKLEY (W R) CORP WRB 1,750 4,616 37.9% 19.3 1.2 (1.9)
BIG LOTS INC BIG 1,079 2,534 42.6% 10.6 (22.4) 23.3
BJ’S WHOLESALE CLUB INC BJ 636 2,725 23.3% 6.0 4.0 10.9
BLOCK H & R INC HRB 2,057 4,963 41.4% 37.9 (2.9) (2.5)
BMC SOFTWARE INC BMC 2,294 9,580 23.9% 14.9 8.9 18.5
BOEING CO BA 17,187 56,316 30.5% 18.2 3.7 1.6
BP PLC  -ADR BP 21,085 137,666 15.3% 1.6 0.7 (4.6)
BRIGGS & STRATTON BGG 202 1,022 19.8% 3.5 (10.6) (3.5)
BRINKER INTL INC EAT 1,678 2,187 76.7% 24.2 1.9 0.7
BRISTOL-MYERS SQUIBB CO BMY 17,454 48,109 36.3% 9.2 6.7 7.3
BRUNSWICK CORP BC 406 1,802 22.5% 8.0 (20.4) (8.5)
CA INC CA 2,095 11,529 18.2% (6.4) (5.6) 0.1
CAMPBELL SOUP CO CPB 7,459 11,192 66.6% 1.4 6.5 3.7
CAPITOL FEDERAL FINL INC CFFN 330 1,966 16.8% 4.9 4.9 1.7
CARPENTER TECHNOLOGY CORP CRS 535 2,201 24.3% 25.2 17.5 (1.0)
CATERPILLAR INC CAT 10,397 65,688 15.8% 9.7 (8.1) 11.7
CBS CORP CBS 3,689 17,868 20.6% 41.2 6.7 3.3
CBS CORP CBS 3,689 17,868 20.6% 40.5 6.7 3.3
CHARLES RIVER LABS INTL INC CRL 769 1,968 39.1% 7.2 (0.7) (2.2)
CHEESECAKE FACTORY INC CAKE 558 1,789 31.2% 1.0 3.0 (1.4)
CHEMED CORP CHE 409 1,420 28.8% 5.3 0.2 5.7
CHOICE HOTELS INTL INC CHH 872 2,104 41.5% (7.6) (9.4) (5.0)
CHUBB CORP CB 3,783 18,957 20.0% 9.4 5.7 7.5
CIGNA CORP CI 5,242 13,120 40.0% 32.4 9.5 5.7
CINCINNATI FINANCIAL CORP CINF 1,201 4,921 24.4% (3.6) (7.9) (1.2)
CINTAS CORP CTAS 799 4,602 17.4% 13.3 4.6 (4.2)
CITRIX SYSTEMS INC CTXS 2,417 15,434 15.7% 20.0 11.8 16.1
COCA-COLA CO KO 27,762 154,502 18.0% 3.4 1.7 13.2
COLGATE-PALMOLIVE CO CL 11,305 42,079 26.9% 8.6 7.3 9.9
COMERICA INC CMA 1,565 6,328 24.7% (15.0) (2.5) (4.4)
COMMERCIAL METALS CMC 290 1,689 17.2% (11.2) (15.3) (7.0)
CON-WAY INC CNW 341 2,094 16.3% 3.9 (3.6) (5.9)
CONAGRA FOODS INC CAG 2,945 10,374 28.4% 14.6 7.8 5.2
CONOCOPHILLIPS COP 20,710 100,825 20.5% 6.6 (9.9) 6.6
CONSTELLATION BRANDS  -CL A STZ 904 4,642 19.5% (1.9) 7.4 (1.9)
CONSTELLATION BRANDS  -CL A STZ 904 4,642 19.5% (1.6) 7.5 (1.9)
CONVERGYS CORP CVG 1,060 1,571 67.5% (1.7) (9.8) (5.7)
COOPER TIRE & RUBBER CO CTB 468 1,461 32.0% 0.2 (8.7) 20.4
CORPORATE EXECUTIVE BRD CO EXBD 629 1,413 44.5% 9.5 1.4 (15.5)
COVANCE INC CVD 734 3,526 20.8% 13.1 6.2 1.4
COVENTRY HEALTH CARE INC CVH 1,268 5,007 25.3% 28.0 6.0 (8.3)
CVS CAREMARK CORP CVS 9,086 51,485 17.6% 10.0 11.0 4.9
CYMER INC CYMI 493 1,428 34.5% 3.8 (17.3) (1.4)
CYPRESS SEMICONDUCTOR CORP CY 1,203 3,599 33.4% 15.3 10.5 38.7
DARDEN RESTAURANTS INC DRI 2,944 7,022 41.9% 12.3 5.5 5.9
DAVITA INC DVA 1,361 8,069 16.9% 21.6 (1.2) 9.4
DEERE & CO DE 5,790 34,972 16.6% 0.4 (14.3) 19.6
DELL INC DELL 28,704 29,536 97.2% 14.3 6.8 (10.0)
DIEBOLD INC DBD 436 2,089 20.9% 1.5 (9.0) (1.5)
DIGITAL RIVER INC DRIV 255 1,208 21.1% (11.5) (18.6) (5.7)
DILLARDS INC  -CL A DDS 1,356 2,759 49.1% 39.7 32.0 14.2
DISH NETWORK CORP DISH 1,569 6,070 25.9% 49.6 20.8 2.1
DISNEY (WALT) CO DIS 23,663 77,799 30.4% 9.7 (4.5) 10.6
DONNELLEY (R R) & SONS CO RRD 1,166 4,256 27.4% 20.7 9.9 (6.2)
DOVER CORP DOV 2,322 11,708 19.8% 7.8 (4.5) 8.8
DREAMWORKS ANIMATION INC DWA 688 1,798 38.3% (16.0) (11.4) (0.5)
DST SYSTEMS INC DST 2,815 2,176 129.4% 6.4 (11.3) (3.9)
DUN & BRADSTREET CORP DNB 2,214 3,965 55.8% (1.8) 0.0 2.6
EASTMAN CHEMICAL CO EMN 1,615 7,105 22.7% 19.5 0.7 18.3
ECOLAB INC ECL 2,521 12,219 20.6% 4.8 3.2 8.2
EL PASO ELECTRIC CO EE 338 1,269 26.6% 9.4 (0.9) 9.4
EMERSON ELECTRIC CO EMR 6,320 40,515 15.6% (4.6) (7.2) 10.4
ENERGIZER HOLDINGS INC ENR 1,668 5,314 31.4% 4.6 7.2 8.1
ENSTAR GROUP LTD ESGR 422 1,351 31.2% 16.6 (1.3)  
ENTERGY CORP ETR 5,525 12,013 46.0% (2.5) 1.6 3.4
EQUIFAX INC EFX 2,032 4,559 44.6% 5.0 (4.2) 0.1
ERIE INDEMNITY CO  -CL A ERIE 872 3,514 24.8% 10.3 0.8 11.4
EVEREST RE GROUP LTD RE 981 4,803 20.4% 4.9 0.3 2.1
EXPEDIA INC EXPE 2,241 6,826 32.8% 10.2 21.6 6.4
EXTERRAN HOLDINGS INC EXH 204 1,273 16.0% (16.9) (16.1) (18.9)
EXXON MOBIL CORP XOM 156,608 397,387 39.4% 11.6 (3.6) 9.2
FAIR ISAAC CORP FICO 1,556 1,145 135.9% 23.2 (9.0) (3.9)
FEDERATED INVESTORS INC FII 779 2,655 29.3% (1.2) (4.2) (0.2)
FERRO CORP FOE 164 1,021 16.1% (18.9) (28.5) (2.9)
FIDELITY NATIONAL INFO SVCS FIS 2,359 9,629 24.5% 15.2 (3.7) 11.1
FISERV INC FISV 2,340 8,980 26.1% 6.8 (0.3) 6.3
FOREST LABORATORIES  -CL A FRX 3,783 9,967 38.0% 8.9 7.9 (3.9)
FORTUNE BRANDS INC FO 3,215 9,680 33.2% 4.9 1.8 (1.8)
GANNETT CO GCI 5,300 3,417 155.1% (5.6) (6.7) (19.7)
GAP INC GPS 10,866 11,234 96.7% (12.1) (14.5) 7.2
GARTNER INC IT 1,045 3,627 28.8% 12.3 (10.5) 25.1
GATX CORP GMT 560 1,778 31.5% 9.5 (0.9) 1.1
GENERAL DYNAMICS CORP GD 4,535 26,557 17.1% 1.8 (6.2) 4.2
GENERAL ELECTRIC CO GE 31,938 205,893 15.5% 6.7 (3.3) (6.4)
GENWORTH FINANCIAL INC GNW 2,700 5,372 50.3% (16.7) (18.6) (17.3)
GOLDMAN SACHS GROUP INC GS 36,295 70,329 51.6% (19.0) (14.4) (0.3)
GRAINGER (W W) INC GWW 2,857 10,314 27.7% 8.7 8.6 16.7
GREENHILL & CO INC GHL 331 1,624 20.4% (32.6) (16.8) (1.5)
HANOVER INSURANCE GROUP INC THG 720 1,880 38.3% (10.9) (8.6) (3.0)
HARLEY-DAVIDSON INC HOG 4,674 8,591 54.4% 5.1 (14.4) (3.8)
HARMAN INTERNATIONAL INDS HAR 1,048 3,252 32.2% 0.6 (0.6) (11.1)
HARSCO CORP HSC 737 2,595 28.4% 15.0 (8.3) (0.9)
HASBRO INC HAS 2,102 6,459 32.5% 1.7 1.9 21.8
HEALTH NET INC HNT 1,627 2,825 57.6% 14.4 (4.5) (3.9)
HEINZ (H J) CO HNZ 4,751 17,169 27.7% 8.9 9.3 8.2
HERSHEY CO HSY 4,052 9,091 44.6% 18.5 2.1 4.4
HIBBETT SPORTS INC HIBB 205 1,083 18.9% 7.1 10.3 4.5
HILL-ROM HOLDINGS INC HRC 558 2,856 19.5% 15.2 19.0 12.5
HOLLY CORP HOC 678 3,229 21.0% 49.0 (0.3) 10.3
HONEYWELL INTERNATIONAL INC HON 8,299 46,024 18.0% 11.3 (1.5) 10.4
HUDSON CITY BANCORP INC HCBK 1,726 4,761 36.2% (27.5) (5.8) (3.3)
HUNT (JB) TRANSPRT SVCS INC JBHT 1,173 5,443 21.6% 11.6 (0.1) 16.4
IAC/INTERACTIVECORP IACI 8,364 3,007 278.2% 22.8 14.0 5.5
IDEXX LABS INC IDXX 1,061 4,473 23.7% 12.7 1.0 14.4
INTEGRA LIFESCIENCES HLDGS IART 284 1,422 19.9% 5.3 5.0 4.5
INTERDIGITAL INC IDCC 569 1,904 29.9% 1.2 (11.8) 12.9
INTL BANCSHARES CORP IBOC 250 1,108 22.6% (17.4) (10.8) (5.3)
INTL BUSINESS MACHINES CORP IBM 96,161 203,797 47.2% 15.6 3.6 17.7
INTL FLAVORS & FRAGRANCES IFF 1,383 5,043 27.4% 13.4 0.7 15.0
INTUIT INC INTU 3,315 16,016 20.7% 7.4 (0.3) 15.5
ITT EDUCATIONAL SERVICES INC ESI 566 1,879 30.1% 5.1 (7.2) 2.5
JACK IN THE BOX INC JACK 571 1,082 52.8% 0.9 (6.0) (0.2)
KEYCORP KEY 1,904 7,863 24.2% (6.5) (6.9) (23.4)
KIMBERLY-CLARK CORP KMB 4,726 26,692 17.7% 8.9 4.1 6.4
KNIGHT CAPITAL GROUP INC KCG 766 1,222 62.7% (11.7) (9.1) (3.9)
KOHL’S CORP KSS 3,643 15,967 22.8% 1.7 3.7 (1.1)
KROGER CO KR 6,732 14,907 45.2% 10.9 3.0 5.2
L-3 COMMUNICATIONS HLDGS INC LLL 2,658 8,783 30.3% 18.7 6.3 1.2
LAM RESEARCH CORP LRCX 1,581 5,760 27.5% (10.6) (18.3) (0.2)
LAMAR ADVERTISING CO  -CL A LAMR 885 2,258 39.2% (27.1) (21.3) (9.1)
LANCASTER COLONY CORP LANC 680 1,667 40.8% 6.8 0.3 11.1
LANDSTAR SYSTEM INC LSTR 763 2,196 34.8% 12.3 0.5 2.6
LAUDER (ESTEE) COS INC -CL A EL 2,850 11,831 24.1% 21.8 2.0 22.8
LAWSON SOFTWARE INC LWSN 327 1,823 17.9% 19.9 (8.3) 7.6
LEGGETT & PLATT INC LEG 1,093 3,641 30.0% 13.3 4.0 4.7
LENNAR CORP LEN 615 3,228 19.1% (7.2) (1.8) (17.5)
LENNOX INTERNATIONAL INC LII 947 2,456 38.6% (2.3) (12.4) 10.0
LEXMARK INTL INC  -CL A LXK 404 2,303 17.6% (16.5) (21.5) (7.9)
LOUISIANA-PACIFIC CORP LPX 280 1,045 26.8% (16.4) (24.7) (18.3)
MACY’S INC M 2,431 12,170 20.0% 13.2 17.8 (7.7)
MAGELLAN HEALTH SERVICES INC MGLN 382 1,643 23.2% 8.7 4.7 5.1
MANPOWERGROUP MAN 1,258 4,942 25.4% (4.2) (4.4) 1.6
MARRIOTT INTL INC MAR 5,348 13,045 41.0% (12.2) 2.3 0.3
MATTEL INC MAT 1,881 9,149 20.6% 5.4 6.5 14.9
MATTHEWS INTL CORP  -CL A MATW 207 1,082 19.2% 5.2 (4.7) 3.6
MAXIMUS INC MMS 359 1,406 25.6% 24.0 0.0 19.4
MBIA INC MBI 2,225 1,756 126.7% (26.7) (12.5) (28.9)
MCDONALD’S CORP MCD 25,143 85,600 29.4% 8.4 8.4 21.4
MCGRAW-HILL COMPANIES MHP 4,958 12,901 38.4% 17.1 7.5 (3.9)
MCKESSON CORP MCK 6,470 21,221 30.5% 19.9 6.5 12.2
MEDCO HEALTH SOLUTIONS INC MHS 11,066 25,451 43.5% 3.9 13.4 17.4
MEDICIS PHARMACEUT CP  -CL A MRX 348 2,266 15.3% 37.3 14.5 2.3
MEMC ELECTRONIC MATRIALS INC WFR 456 2,343 19.5% (9.7) (21.5) (21.9)
MENS WEARHOUSE INC MW 413 1,706 24.2% 33.2 22.5 (3.5)
MERCK & CO MRK 22,433 113,895 19.7% 3.6 11.8 5.1
METTLER-TOLEDO INTL INC MTD 1,057 5,298 20.0% 9.0 (4.2) 23.7
MICROSTRATEGY INC MSTR 475 1,085 43.8% 58.4 0.7 8.6
MINE SAFETY APPLIANCES CO MSA 271 1,310 20.7% 16.6 (1.8) 1.9
MINERALS TECHNOLOGIES INC MTX 466 1,172 39.8% (1.8) (6.4) 3.9
MOLEX INC MOLX 1,098 4,338 25.3% 18.1 6.1 (3.9)
MOLEX INC MOLX 1,098 4,338 25.3% 18.9 7.5 (3.9)
MOODY’S CORP MCO 4,407 8,634 51.0% 43.9 12.2 (7.7)
NASDAQ OMX GROUP INC NDAQ 796 4,406 18.1% 5.1 (3.5) (6.2)
NRG ENERGY INC NRG 1,503 5,955 25.2% 26.4 14.7 0.3
NU SKIN ENTERPRISES  -CL A NUS 477 2,272 21.0% 22.6 28.5 17.1
NVR INC NVR 3,240 4,303 75.3% 5.8 (3.3) (0.4)
OMNICOM GROUP OMC 4,697 13,140 35.7% 2.6 (4.7) 3.4
PARTNERRE LTD PRE 1,083 5,141 21.1% (3.9) (3.2) 7.9
PETSMART INC PETM 1,335 5,094 26.2% 13.5 10.1 9.8
PITNEY BOWES INC PBI 4,480 4,958 90.4% 3.6 (3.9) (5.6)
POLYONE CORP POL 306 1,304 23.4% 12.1 (1.8) 10.3
PPG INDUSTRIES INC PPG 4,708 13,705 34.4% 4.4 (8.4) 10.9
PRINCIPAL FINANCIAL GRP INC PFG 4,725 10,022 47.1% (4.2) (2.9) (6.2)
PROCTER & GAMBLE CO PG 61,309 187,156 32.8% 5.9 9.7 4.9
PRUDENTIAL FINANCIAL INC PRU 11,173 30,322 36.8% 6.3 1.3 (2.4)
QUAD/GRAPHICS INC QUAD 296 1,343 22.0% (0.6) (3.6)  
QUEST DIAGNOSTICS INC DGX 2,158 9,085 23.8% 7.4 0.2 1.0
RADIOSHACK CORP RSH 949 1,643 57.8% (16.2) 3.2 0.1
RAYTHEON CO RTN 6,900 17,599 39.2% 8.4 (2.0) 4.3
REGIONS FINANCIAL CORP RF 1,402 8,582 16.3% (2.3) (5.9) (24.6)
RENT-A-CENTER INC RCII 904 1,991 45.4% (2.7) (10.2) 2.2
RLI CORP RLI 393 1,261 31.1% 14.5 3.9 5.5
ROCKWELL AUTOMATION ROK 2,136 11,748 18.2% 14.5 (13.6) 6.2
ROCKWELL COLLINS INC COL 1,497 9,309 16.1% 4.5 (6.4) 3.6
SAFEWAY INC SWY 6,284 8,821 71.2% 11.4 5.8 0.8
SCHWAB (CHARLES) CORP SCHW 4,247 20,744 20.5% 1.1 (4.3) 2.7
SEACOR HOLDINGS INC CKH 903 2,081 43.4% (4.9) 3.9 5.1
SEARS HOLDINGS CORP SHLD 5,826 7,737 75.3% (2.6) (13.1) (9.8)
SHERWIN-WILLIAMS CO SHW 4,391 9,084 48.3% 2.8 2.0 12.5
SIGMA-ALDRICH CORP SIAL 2,051 8,314 24.7% 2.8 7.3 16.8
SLM CORP SLM 1,876 8,433 22.3% 27.0 4.5 (20.4)
SPX CORP SPW 2,516 4,020 62.6% 10.6 (0.7) 11.3
ST JOE CO JOE 931 2,038 45.7% 1.1 (11.9) (13.8)
STAPLES INC SPLS 3,787 11,917 31.8% (26.2) (14.0) (3.1)
STEEL DYNAMICS INC STLD 728 3,625 20.1% (8.8) (11.6) 5.1
SUNOCO INC SUN 4,387 4,753 92.3% (1.9) (13.6) (10.0)
SUPERVALU INC SVU 521 2,155 24.2% 6.6 13.8 (14.7)
SYNAPTICS INC SYNA 282 972 29.0% (3.4) 5.0 10.2
SYSCO CORP SYY 4,408 18,858 23.4% 11.9 16.7 2.5
TECH DATA CORP TECD 467 2,188 21.3% 6.7 (7.6) 7.7
TECHNICOLOR  -ADR TCLRY 207 1,172 17.7% 40.8 (7.7) (45.5)
TELEPHONE & DATA SYSTEMS INC TDS 739 2,943 25.1% (12.1) (5.0) (2.0)
TELEPHONE & DATA SYSTEMS INC TDS 739 2,943 25.1% (10.8) (5.1) (2.0)
TELETECH HOLDINGS INC TTEC 323 1,009 32.0% (13.6) (8.2) 9.1
TELLABS INC TLAB 1,222 1,664 73.4% (31.9) (12.2) (20.7)
TEMPLE-INLAND INC TIN 584 2,419 24.1% 5.7 (4.6) 4.3
TEMPUR PEDIC INTL INC TPX 713 4,291 16.6% 56.5 23.7 32.6
TENET HEALTHCARE CORP THC 1,479 3,074 48.1% (6.1) (15.7) (3.6)
TEREX CORP TEX 599 3,094 19.4% (9.1) (23.8) (4.3)
TEXAS INSTRUMENTS INC TXN 16,411 39,770 41.3% 6.2 (0.5) 2.0
TIMBERLAND CO  -CL A TBL 747 1,313 56.9% 29.6 (22.8) 5.8
TIME WARNER INC TWX 29,033 38,710 75.0% 13.1 1.3 2.8
TRAVELERS COS INC TRV 14,857 25,735 57.7% 11.0 3.3 10.2
UMB FINANCIAL CORP UMBF 361 1,696 21.3% 1.5 12.0 6.1
UNITED STATIONERS INC USTR 773 1,625 47.5% 11.2 (0.5) 6.2
UNITED TECHNOLOGIES CORP UTX 17,468 78,795 22.2% 10.5 2.3 9.7
VALASSIS COMMUNICATIONS INC VCI 508 1,380 36.8% (13.2) (3.6) (0.3)
VALERO ENERGY CORP VLO 6,462 14,787 43.7% 12.6 (12.9) (14.0)
VARIAN SEMICONDUCTOR EQUIPMT VSEA 733 4,615 15.9% 65.5 25.7 13.9
VERISK ANALYTICS INC VRSK 1,106 5,179 21.4% (0.4) 3.6  
VIACOM INC VIA.B 5,725 29,895 19.2% 30.3 11.8 5.5
VIACOM INC VIA.B 5,725 29,895 19.2% 26.6 7.5 5.5
WASHINGTON POST  -CL B WPO 2,158 2,770 77.9% (4.9) (5.0) (9.2)
WASTE MANAGEMENT INC WM 4,904 18,224 26.9% 5.2 2.9 4.4
WATERS CORP WAT 2,509 8,913 28.2% 25.2 11.9 16.7
WEIGHT WATCHERS INTL INC WTW 1,794 6,140 29.2% 124.8 19.9 11.7
WESCO INTL INC WCC 591 2,259 26.2% (0.7) (16.1) (3.8)
WHIRLPOOL CORP WHR 1,823 6,139 29.7% (8.3) (5.1) 1.8
WOLVERINE WORLD WIDE WWW 377 1,890 19.9% 19.8 2.1 11.5
WYNDHAM WORLDWIDE CORP WYN 1,107 5,745 19.3% 13.4 6.3  
ZEBRA TECHNOLOGIES CP  -CL A ZBRA 462 2,275 20.3% 9.6 6.1 (0.2)
ZIMMER HOLDINGS INC ZMH 3,545 12,861 27.6% 24.8 10.7 0.7
AVERAGE   4,876 15,661 35.9% 7.8 (0.5) 2.4


Kenneth Hackel, CFA











The Folly of 90%+ Security Analysts-How They Define Free Cash Flow

May 4th, 2011



Over 90% of security analysts and companies which file with the SEC define free cash flow as cash flow from operating activities minus capital spending. This is incorrect. Of course, many firms tailor-make their own free cash flow definition.

It ignores the important misclassifications, one-time items, and areas of overspending as well as required spending (underpayments to pension plans, claims, etc.) that firms have not made, but need to.

A rather obvious example is that of Dr Pepper Snapple Group, which a simple investment screen would show as selling for 4x free cash flow. The reason is the recording as an operating cash flow activity one-time nonrefundable cash payments of $900 million from PepsiCo and $715 million from Coca-Cola, both recorded as deferred revenue.

Unfortunately, at CT Capital LLC, we come across a large number of less obvious and even “hidden”  within footnote and income statement items, activities which most analysts may not consider and which beefed up operating (therefore “free”) cash flows. For instance many firms bury asset sales and collections on insurance within broad classifications. Including these and other such items provides for a faulty appraisal of fair value.

For a complete discussion on this topic see Security Valuation and Risk Analysis..


Kenneth S. Hackel, CFA



There Must Be a Better Way to Reward Shareholders

April 29th, 2011


There Must Be a Better Way to Reward Shareholders


In Microsoft’s 10-Q filed today, it was revealed that for only the second quarter in at least 10 years, the firm did not buy back net shares (repurchases minus new issuance). In fact, shares outstanding actually increased over the prior quarter.  Is management learning, or does it represent an anomaly? Over the past decade, MSFT has spent over a third of its current market value on its repurchase program, when it initially had a market value of $325 billion, or 46% higher than today.

In the past 20 years, Microsoft repurchased a net $93.5 billion of its outstanding shares, surely to go down as a landmark waste of corporate cash.

When Microsoft announced its two $40 billion buyback authorizations, analysts were out front hailing the acts as “bold” and predicted they would be cheered by investors.

Quite obviously, shares in Microsoft have been a subpar investment, yet, to date, its largest shareholder continues to endorse the failed programs. If Mr. Gates would like to have more capital for his foundation, I would recommend he make better investments in technology, including joint ventures.  Imagine if someone at Microsoft had the foresight to invest in Facebook, or in one or several of the hundreds of successful internet based enterprises, at reasonable values, when such was possible. They didn’t see the tablet revolution, which one would think would have been “in their wheelhouse” given the billions they spend each year on R&D.

During the past 12 months MSFT spent almost $11 billion net, or 4.8% of its current market value to repurchase 3.8% of its current market value, continuing to prove the folly of share buybacks.

Share buybacks do nothing to improve return on invested capital, serve to bump up the cost of capital due to the shift in financial structure, and most often, are a reflection of managerial ineffectiveness in deploying the firm’s capital. Microsoft has certainly proven the latter to be true.


SIC: 7,372.000
GICS: 45103020
Purchase Com & Pref Stock Sale of Com/Pref Stock Net
Jun01 6,074.000 1,620.000 4,454.000
Jun02 6,069.000 1,497.000 4,572.000
Jun03 6,486.000 2,120.000 4,366.000
Jun04 3,383.000 2,748.000 635.000
Jun05 8,057.000 3,109.000 4,948.000
Jun06 19,207.000 2,101.000 17,106.000
Jun07 27,575.000 6,782.000 20,793.000
Jun08 12,533.000 3,494.000 9,039.000
Jun09 9,353.000 579.000 8,774.000
Jun10 11,269.000 2,311.000 8,958.000
YTD Mar 10,299.000 2,242.000 8,057.000
SUM 83,645.000




CT Capital LLC is an investment advisory firm based in Alpine, New Jersey, specializing in the detailed analysis of free cash flow, cost of capital, and return on invested capital.



Kenneth S. Hackel, CFA

Follow me on Twitter @ credittrends



Security Valuation and Risk Analysis: Assessing Value in Investment Decision-Making, Fall 2010, McGraw-Hill





Protected: Upcoming Financial Results—General Issues

April 11th, 2011

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Interview with the CFA

March 22nd, 2011

Last month I sat down with David Larrabee, CFA,  of the CFA Institute to discuss how investors and analysts should define and measure free cash flow, cost of capital and return on invested capital.

It may be seen at

Protected: Stock Based Compensation-An Important Metric in Fundamental Cash Flow Analysis

March 22nd, 2011

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A Comprehensive Understanding of Individual Security Risk

March 15th, 2011

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Japan and Country Risk

March 14th, 2011


While I have written on the subject of sovereign or country risk before, the tragic earthquake in Japan again forces us to revisit the topic.

One source in our analysis is the US State Department website. They write:

“Japan is faced with the ever-present danger of deadly earthquakes and typhoons.  Japan is one of the most seismically active locations in the world; minor tremors are felt regularly throughout the islands.  While responsibility for caring for disaster victims, including foreigners, rests with the Japanese authorities, one of the first things you should do upon arriving in Japan is to learn about earthquake and disaster preparedness from hotel or local government officials.”

Prior to the disaster, at CT Capital, we had marked-up all Japanese based firms by 35 basis points over Canada, and 10 basis points over the U.S. This mark-up is now 90 basis points over Canada and 65 basis points over the U.S. The additional mark-up reflects the stepped-up exposure to disasters and the current impact on of the disaster on the general economy. There is also some exposure to terrorism in Japan, but not at a level greater than the U.S.


Country Risk-Summary

Companies that are subject to certain jurisdictions may be riskier (political, currency, taxes) for investors than U.S. – based companies.  This was acutely reflected during the fiscal crises in Greece during 2010, with almost immediate repercussions throughout Europe, Asia and the United States. The resultant weakness in the euro impacted US entities with operations in Europe or sold into that market with the US dollar based goods. On the other hand, the price of oil dropped since its price is quoted in dollars.  During the period the crisis was at its peak, many entities which had planned to enter the debt markets to raise capital were not able to do so.

The conditions under which a company operates and has major facilities or markets will thus influence cash flows, consistency measures and leverage. As we have seen, energy exploration companies have had their operations nationalized, while many companies have been harmed by high inflation outside the United States. If an entity receives a significant portion of its cash flows from a non-US geography, the risk to those cash flows must be assessed, with a mark up to cost of capital, where appropriate. This is especially true for companies operating in emerging markets, where a mark-up to cost of capital is always made, even if the cash flows from those areas are currently strong and without incident.

All possible threats and the entity’s sensitivity to any related factors must be considered, including sanctions, tariffs, threat of retaliation of US Government actions, stability of currency, exchange control, inflation, threat of its neighboring countries, restrictions, etc.

At CT Capital, we evaluate 19 factors in our cost of equity capital model, including, in addition to the above, form of government, natural disasters, energy dependence, corruption and commitment to markets and business.


For additional information, please see “Security Valuation and Risk Analysis”


Ford-Good Engineering-of the Financial Kind

March 4th, 2011

The decision by Ford to eliminate its tax liability valuation reserve represents financial engineering in its truest sense. While, according to Bloomberg, the act will add $10 billion to $13 billion in net income this year, it has no impact on free cash flows.

Given the volatility in the automotive sector, there is little assurance that Ford will remain a tax paying entity, given it has received refunds (a negative tax rate) in four of the past 10 years.

Consistent tax rate companies at any level normally also have cash flows that are more predictable- Ford, it cannot be argued has been a historically consistent generator of free cash flows.


Owing to losses occurring during 2008, many entities were forced to establish or increase their valuation reserves based on their historical taxable income and projected future taxable income, including the expected timing of the reversals of existing temporary differences. If the entities operated at a loss for an extended period of time, were unable to generate sufficient future taxable income, or if there was a material change in the effective tax rates or time period within which the underlying temporary differences become taxable or deductible, these entities could be required to record a valuation allowance against all or a significant portion of their deferred tax assets, which could increase their effective tax rate for such a period substantially. This could affect cash flows for those firms that used a simple definition of cash flow as net profit plus depreciation.


Obviously, Ford management wished to avoid a continuation of this scenario.


Kenneth S. Hackel, CFA


Risk Rising Modestly

February 22nd, 2011


Changes in risk-real or perceived-has been at the crux of every major economic and financial dislocation. Most recently, the fall in prices of financial instruments leading up to the 2008 worldwide credit crisis and subsequent 2009 price recovery began with a whiff of credit depression and later, relaxation.

Even for periods between crisis and recession, political and self-inducing events can place valuations and prices under strain, forcing an upward revaluation of cost of capital.  As such, equity investors must continuously monitor change in the financial markets risk profile. If the perception of risk is increasing, even if cash flows and credit health are currently strong, one should expect the prices of financial instruments to decline.

This risk to cash flows is incorporated and is the purpose of the cost of equity capital.

Current political tensions have slightly elevated the risk to free cash flows, causing us to raise our cost of equity capital by 15 basis points for all U.S.-based companies. From China to the Mid-East, the re-valuation of risk metrics in our models is apparent; however, an over-reaction to events  is also not justified given the factors we look at. We do not carry direct investments in the most effected countries.

Included in the factors we assess when assigning a cost of capital score for the sovereign risk metric include terrorism, inflation history, fear of nationalization, hunger, poverty, and corruption. Needless to say, most of these metrics pointed to the negative outcome we are witnessing today.

The groundswell that began in Egypt is empowering citizens around the globe, and while it has not spread to the most industrialized nations, it would be naive to assume, given large budget deficits in U.S. States and Federal government, there could not be some backlash here as well. Pensions and rising costs (education, food, and clothing) could spur scattered protests and widespread news coverage.

At present such risks are contained, but one which could impact both the current level of consumer confidence as well as capital decisions. And while a 15 basis point increase will not result in a shift to our current portfolio, it does serve to ratchet up the required return for making equity investments.

Inflation is also a weighty factor in the cost of capital, entering into both the risk free rate as well as other metrics.

It is difficult to find a reporting firm that has not been negatively impacted by the rise in input costs, with warnings of a continuing negative impact to come. In China, some companies are reporting wages are rising as much as 40% for factory workers. We currently assess a cost of capital for Chinese companies 75 basis points greater than Canadian companies given similar free cash flows and credit health. US firms receive a 25 basis point mark-up over Canadian firms.

Here in the U.S., yields are rising due to commodity cost pressure and, according to Federal Reserve data, lower foreign purchases of U.S. bonds. Hedge funds are also increasing their leverage, according to Federal Reserve data which tracks borrowing against bonds not tied to the US Government, as these funds attempt to leverage up.

While our credit models continue to indicate improvements to free cash flow, we are not seeing a strengthening in credit for the S&P Industrials over the past 2 quarters, which we can tie directly to the outlays for share repurchases.

All in all, we cannot be so blind as to ignore recent happenings, as is captured by our various model metrics, including credit spreads and political tensions. We see that yields on third world debt and credit default swaps have been rising as well, while the latter remain steady for U.S. fixed income instruments, perhaps a result of Federal Reserve policy and hedge fund buying.

With cost of capital having slightly risen, one would expect investors to pay closer attention to cash flow and credit. This has not generally been the case over the past year and a half, as evidenced by the tightness of junk bond yield spreads.

Kenneth S. Hackel, CFA

Protected: Pensions – Is $3 Trillion in Equities About to Hit the Market?

February 11th, 2011

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For An Accurate Presentation of Free Cash Flow, Correct Classification of Statement Items Required

February 7th, 2011

A review of EDGAR filings, the SEC system for which public companies transmit financial information, finds over 90% of reporting companies defining free cash flow as operating cash flow minus capital expendituresExample:

MORRIS TOWNSHIP, N.J., January 28, 2011– Honeywell (NYSE: HON) today announced full-year 2010 sales increased 8% to $33.4 billion vs. $30.9 billion in 2009. Earnings per share (proforma) were up 12% to $3.00 versus $2.69 in the prior year, excluding the unfavorable impact of the pension mark-to-market adjustment. Reported earnings per share for 2010 were $2.59 versus $2.05 in the prior year. Free cash flow (cash flow from operations less capital expenditures) was a record $3.6 billion (cash flow from operations of $4.2 billion).

Source: Honeywell 8K

Unfortunately, corporate financial reporting does not often provide investors with an accurate assessment of the real free cash flows, and hence adjustments to reported financial statements are required. Free cash flow should be defined as the maximum amount of cash an entity could distribute to shareholders without impairing its rate of growth or through return of capital.

Hence, it is up to the analyst to reclassify those financing and investing activities which are more appropriately operating activities and, as such, would provide (potential) investors with a more realistic indication of the true free cash flow generating capacity of the enterprise. This is true even though classification of a particular activity is prescribed or generally accepted, as we see in the examples below.


For “payments to noncontrolling interests”, to whom as long as they continue to operate profitable operations may be due cash, payments are classified as financing activities while the purchase of the noncontrolling interests would be classified as an investing activity. Unfortunately, for investors who fail to reclassify the payments to the operating activity section, under the common definition of free cash flow, the reader of the financial statement is left with the impression of exaggerated, and incorrect, free cash flows.

For instance, AmSurg Corporation (AMSG), in partnership with physicians, operates surgery centers, where the partnerships may result in cash payments due the minority owners. Such operating cash payments which may result from profitable locations are as much a cost of doing business as payment of salaries or taxes. In common practice, the company classifies these outflows as Financing Activities, the payments representing “outflows or other distributions to owners”, as set forth under FAS 95.

Under the microscope of free cash flow, where free cash represents the income to shareholders of the common stock, the analyst would need to deduct such outflows, which in AmSurg’s case, is sizeable, accounting for over half of reported Cash Flow from Operating Activities (see below). To do otherwise would seriously misrepresent free cash flows as these payments could not be given to shareholders without impairing capital.

To conclude that AmSurg had free cash flows of $214 MM (we add sale of PPE in the Statement shown) would be incorrect. The analyst would need to reclassify the $130.9 MM as an operating activity from which capital spending and proceeds from PPE would be factored, leaving free cash flow as $83.1 MM, or 37% less than would normally be defined.

At CT Capital, as explained in Security Valuation and Risk Analysis, we also account for overspending in discretionary areas, so that, in the case of AmSurg, we would add $2.7 MM back to free cash flow to account for overspending in its cost of goods sold, which could represent overspending of many items in the production and sales process. We would also deduct half of the share repurchases, or $6.3MM, which represents that amount of cash necessary to maintain a steady share count over the prior year. Share based compensation has a real cost. The other half of the buyback would in fact represent free cash flow. Thus free cash flow for the year would approximate $79.5MM, which would depict the maximum distributable cash available for shareholder distribution, or free cash flow.

When making adjustments to published financial statements, the analyst must also adjust or normalcy of one-time (extraordinary) payments or events. Also, taxes, interest and dividends a firm would classify as an investing or financing activity should most often be melded into operating activities. This will also allow for better comparability.

AmSurg Corp.
Consolidated Statements of Cash Flows
Years Ended December 31, 2009, 2008 and 2007
(In thousands

2009 2008 2007
Cash flows from operating activities:
Net earnings $ 181,350 $ 165,926 $ 150,303
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization 22,927 20,815 18,648
Net loss on sale and impairment of long-lived assets 455 922 724
Share-based compensation 4,068 4,710 4,560
Excess tax benefit from share-based compensation (32 ) (1,351 ) (3,322 )
Deferred income taxes 14,703 14,729 8,063
Increase (decrease) in cash and cash equivalents, net of effects of acquisitions and dispositions, due to changes in:
Accounts receivable, net 1,494 3,792 (2,300 )
Supplies inventory (60 ) (83 ) 47
Prepaid and other current assets (733 ) 2,344 (2,958 )
Accounts payable 1,289 (1,904 ) 962
Accrued expenses and other liabilities 6,666 (487 ) 8,128
Other, net 457 283 61
Net cash flows provided by operating activities 232,584 209,696 182,916
Cash flows from investing activities:
Acquisition of interests in surgery centers and related transactions (95,826 ) (118,671 ) (162,777 )
Acquisition of property and equipment (19,930 ) (18,379 ) (24,640 )
Proceeds from sale of interests in surgery centers 1,298 3,812 5,433
Repayment of notes receivable 1,666 1,458 2,616
Net cash flows used in investing activities (112,792 ) (131,780 ) (179,368 )
Cash flows from financing activities:
Proceeds from long-term borrowings 137,178 157,787 178,316
Repayment on long-term borrowings (116,951 ) (114,788 ) (89,712 )
Distributions to noncontrolling interests (130,855 ) (118,769 ) (103,545 )
Proceeds from issuance of common stock upon exercise of stock options 201 9,970 17,661
Repurchase of common stock (12,587 ) (12,413 )
Capital contributions and ownership transactions by noncontrolling interests 1,036 582 480
Excess tax benefit from share-based compensation 32 1,351 3,322
Financing cost incurred (17 ) (41 ) (200 )
Net cash flows (used in) provided by financing activities (121,963 ) (76,321 ) 6,322
Net (decrease) increase in cash and cash equivalents (2,171 ) 1,595 9,870
Cash and cash equivalents, beginning of year 31,548 29,953 20,083

Exhibit 2

In the Statement of Cash Flows for Boeing (BA), we would reclassify both the “Payments to noncontrolling interests” and the “payments on guarantees” to the operating activity section, thereby reducing free cash flows. Payments on guarantees represent the impact and success of the firm’s operations, including its ability and technical skills in the manufacturing process as well as their ability to provide services promised, and should therefore be considered operating, not financial or investing activities. Payment on guarantees would be considered a reversal of profits, which is an operating activity under the indirect method.

The Boeing Company and Subsidiaries

Consolidated Statements of Cash Flows

(Dollars in millions)
Years ended December 31, 2009 2008 2007
Cash flows – operating activities:
Net earnings $ 1,312 $ 2,672 $ 4,074
Adjustments to reconcile net earnings to net cash provided by operating activities:
Non-cash items –
Share-based plans expense 238 209 287
Depreciation 1,459 1,325 1,334
Amortization of other acquired intangibles 207 166 152
Amortization of debt discount/premium and issuance costs 12 11 (1 )
Investment/asset impairment charges, net 151 50 51
Customer financing valuation provision 45 84 (60 )
(Gain)/loss on disposal of discontinued operations 36 (28 ) (25 )
(Gain)/loss on dispositions, net 24 (4 ) (38 )
Other charges and credits, net 214 116 197
Excess tax benefits from share-based payment arrangements (5 ) (100 ) (144 )
Changes in assets and liabilities –
Accounts receivable (391 ) 564 (392 )
Inventories, net of advances and progress billings (1,525 ) (6,168 ) (1,577 )
Accounts payable 1,141 318 (198 )
Other accrued liabilities 1,327 554 1,126
Advances and billings in excess of related costs (680 ) (1,120 ) 2,369
Income taxes receivable, payable and deferred 607 744 1,290
Other long-term liabilities (12 ) (211 ) 71
Pension and other postretirement plans 1,140 14 (143 )
Customer financing, net 104 432 1,458
Other 199 (29 ) (247 )
Net cash provided/(used) by operating activities 5,603 (401 ) 9,584
Cash flows – investing activities:
Property, plant and equipment additions (1,186 ) (1,674 ) (1,731 )
Property, plant and equipment reductions 27 34 59
Acquisitions, net of cash acquired (639 ) (964 ) (75 )
Contributions to investments (2,629 ) (6,673 ) (5,710 )
Proceeds from investments 1,041 11,343 3,817
Payments on Sea Launch guarantees (448 )
Reimbursement of Sea Launch guarantee payments 40
Purchase of distribution rights (178 ) (182 )
Net cash (used)/provided by investing activities (3,794 ) 1,888 (3,822 )
Cash flows – financing activities:
New borrowings 5,961 13 40
Debt repayments (551 ) (738 ) (1,406 )
Payments to noncontrolling interests (40 )
Repayments of distribution rights financing (357 )
Stock options exercised, other 10 44 209
Excess tax benefits from share-based payment arrangements 5 100 144
Employee taxes on certain share-based payment arrangements (21 ) (135 )
Common shares repurchased (50 ) (2,937 ) (2,775 )
Dividends paid (1,220 ) (1,192 ) (1,096 )
Net cash provided/(used) by financing activities 4,094 (5,202 ) (4,884 )
Effect of exchange rate changes on cash and cash equivalents 44 (59 ) 46
Net increase/(decrease) in cash and cash equivalents 5,947 (3,774 ) 924
Cash and cash equivalents at beginning of year 3,268 7,042 6,11

Additional disclosure: CT Capital is long AMSG for client portfolios

Mergers, Importance of Factoring Stock Based Compensation, and Are Analysts Too Top Line Oriented?

January 28th, 2011

Capital deploying investments typically have a negative effect on their current period’s cash flows. If viewed as projects which safely add to ROIC above cost of capital, such investments can be expected to benefit shareholders, even if the short-term cash flows are impaired. As firms ramp up production or go through the common but expensive integration costs, investors should not lose sight of longer term benefits. Unfortunately, this is often not the case, and so, for investors who can spot and take advantage of the market’s skepticism, superior returns await.

» Read more: Mergers, Importance of Factoring Stock Based Compensation, and Are Analysts Too Top Line Oriented?

Protected: Marathon Oil Sure to Be Emulated

January 13th, 2011

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