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Ahknaten thinks about F-Score Fudged Up Accounting - research by Dechow, Ge, Larson and Sloan -- Apple Part 3

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I thought it might be interesting to note two articles that came out in Forbes. This research has been around for a while, but it's finally getting some expanded press. Recently I was chatting with a few of my friends and I had mentioned an F-Score (this is yet another reason why I dislike some of the stocks I dislike). Well, take a look at the articles in the latest Forbes entitlted 'Google's Bad Grade', by Susan Kithcens and 'F is for Fudging' by Daniel Fisher. They cover some research that was done by Dechow, Ge, Larson and Sloan.

Here's a link to the paper:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=997483

Here's a link to the article:
http://members.forbes.com/forbes/2007/1029/072.html
and here
http://members.forbes.com/forbes/2007/1029/076.html

It's a fascinating article and if you hear me say that I dislike a stock partially because it has a bad f-score, you'll know where I got the idea from.

Remember my Apple blog at
http://www.investorplaceblogs.com/users/ahknaten/2007/09/ahknaten_doesnt_like_aapl.php
and
http://www.investorplaceblogs.com/users/ahknaten/2007/09/ahknaten_likes_aapl_tables_app.php


So Apple, perhaps has a high F-Score (and remember that this can be a false positive) and I have to think and wonder...

1. Accruals are high? Past academic evidence (Sloan 1996) shows that high accruals can be bad.
2. The company keeps beating earnings by roughly 0.10 to 0.40 for the past year. Perhaps analysts and the market expect it to continue? Logic tells me that it can't continue for long. At some point the analysts will smarten up and choose better EPS estimates, or Apple will have a harder time posting numbers that exceed analysts?
3. The stock gets a high F-score?
4. Prepaid stuff has increased in Apple?
5. My DCF valuation gets a target price of $75

So, putting all that information together... I have to wonder if it'll take a big bath soon? Who knows, Apple went up after the last blogs, so my timing sucks. Who knows, maybe I'm wrong, but I'll stay away from this stock for now.

Comments (1)

don ferk:

Ahknaten,
Good Show! Well Done. Your the King Tut of this Contest - a "Ra" of light in this Anne McCaffery "Left Hand Side of Darkness" Universe.

THIS One's between You & Me and the Deep Apple Blue Sea----

___I remember the Halcyon days of Apple - Steve "The Woz" Wozniak ( who invented the Operating System (OS) and called it OmniMon),The Apple II, the memory that ran so hot you had to get an electronic "refrigeration' device to cool it down to prevent self-destruction.
___The Nerds at Apple got so rich that they lost sight of "The Dream". Woz quit, So did Jobs. What happened was ugly. With new-found wealth Management & Staff started to engage in Bizarre Bad Behavior - They started having 'Office Romances' - sleeping with Co-workers. Jealousies and Organizational Dynamics ( aka Office Politics ) and hatreds from broken-off love affairs and back-stabbing revenge from when your love interest's next love interest set in. Apple self-destructed. Jobs ccame back as the White Knight to restore Moral order and Work Ethic. It worked. See the results. Apple's "Beatle" Rainbow Apple logo is now a Blue,blue Apple. This may be emblematic of an new 'recidivism' at Apple,Inc. Where is the Wizard of Woz,now, I ask.
--- Europe isn't "buying the latest 'gadget' gizmo thing. The 'roaming' charges are scandalous. Competition is a Hell-hound nipping an inch from their on-the-run Buttocks.
---In your analysis you talk about R&D expenses. In High-Tech these capitalized costs are not always recovered by the product, which rapidly becomes obsolete. They are held on the Books as R&D 'Assets' but are really non-cash write-off liabilities for the Future. They killed Cray research, crippled Sin MicroSystems, etc. etc. Maybe you should consider the Time-Bombs in some of these Big Mo plays, like Apple, There is also the "coupon" problem, Microsoft, incuurred Billions in liabilitie to get the Windows XP out the door by Christmas - putting out a flawed version and guaranteeing "replacements" or low-cost upgrades when the next-best-thing came out. Problems DELAYED are NOT problems SOLVED -- that is VW's Time-Bomb Theory for Bankers & Hackers & Slackers.
----Hope this helps - maybe I'm just "enabling" you with re-inforcement. Take it or Leave it, I say. With Respect, Don Lee Ferk ( aka VikingWarrior ) SLO-Port : RuthLessIntent.

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