McLean Capital is a private independent research firm, bottom up fundamentally driven. The stock rating methodology identifies conservative companies that have superior cash flow characteristics and those speculative companies that have poor cash flow characteristics.
Methodology
The aim of this research is to provide a financial overview of a company based on its cash flow. In the United States, a company that offers its common stock to the public needs to file periodic financial reports with the Securities and Exchange Commission (SEC). These reports, income statement, cash flow statement and balance sheet paint a picture of the financial health of that company. They are based on Generally Accepted Accounting Principles (GAAP). Because the conceptual framework is general, it receives interpretation, and often re-interpretation. Consequently, sitting on top of this framework is a growing pile of literally hundreds of accounting standards and complexity in the rules is unavoidable. McLean believes earnings are opinions while cash flows are facts. The goal of all companies is to create value for the shareholder. The performance metric used to evaluate performance is Economic Profit.
Economic Profit is based on classical financial theory and is not entirely different from traditional free cash flow measures. The conceptual pillar to support economic profit is the fact that access to equity capital is an expense and is not free. The company does not create value until a threshold level of return is generated for shareholders after the cost of equity capital is deducted. A company may earn an accounting profit (net income) but may not necessarily earn an economic profit. Economic profit boils down a set of adjustments that translate an accrual-based earnings (net income) into a cash-based earnings measure. The idea is simple but rigorous, true profits should account for the cost of capital. This is exactly how companies make internal decisions about how to allocate their own limited resources based on money generated versus money invested. Successful companies do not make these decisions based on net income, but rather on an economic profit basis. The difference between investment and speculation is related to whether a company generates an Economic Profit.
What's Provided on Fidelity.com?
- Stock Research Reports - updated weekly, including a Buy, Neutral, Sell rating.
- Industry comparisons for the stock, based on Economic Profit
- Analysis of dividends from a free cash flow perceptive.
- A risk profile based on the cash flow statement.
