New York – New Constructs is an independent research provider that utilizes forensic methods in its stock selection process. Their process is heavily weighted towards the assessment of the “Notes to Financial Statements” in the annual reports of the companies covered. The firm’s analysts leverage a patent-pending system to extract relevant information from SEC fillings, which they scrutinize for anomalies or inconsistencies. Additionally, the service calculates free cash flow, return on invested capital and the economic value added of the stocks it tracks.
New Constructs, founded by David Trainer, incorporates the full annual report into the analysis of about 3,000 companies. From this pool, New Constructs selects a monthly listing and analysis of the “Most Attractive and Most Dangerous Stocks”. For the past eight years, New Constructs has been providing this publication to clients, which is essentially a high-conviction trading ideas report. Indeed, in 2009, New Constructs had the second best performance in the Barron’s stock picking contest. The recipe for New Constructs “special sauce” is detailed on the New Constructs website and in every company valuation report the firm publishes. Mr. Trainer believes sharing the “recipe” will encourage investors to buy New Constructs’ research not duplicate it because of the time intensity and difficulty in replicating his firm’s research.
In 2008, Mr. Trainer opened a hedge fund, which is at arm’s length from the New Constructs research product, other than it utilizes the same database that drives New Constructs’ research. Since its inception, the hedge fund has beaten the S&P 500 by about 50% according to internal estimates. In 2010 to date, the outperformance has been 12% (to March 10th).
Recently New Constructs provided information for a subcommittee of the Senate Banking Committee. Mr. Trainer supplied reports to the Committee in preparation for financial reform dialog. These reports were also sent to the SEC, the FDIC and the Congressional Oversight Panel. The briefs conclude that the markets are not necessarily in need of greater regulation. What is needed, according to Mr. Trainer, is greater transparency and greater attention to the financial statements. This will allow the capital markets to self-regulate and allocate resources effectively. New Constructs methods ferret out the intentionally “buried” details in the notes to the financials and would therefore be of help to the regulators as they do their job, according to Trainer.
While the New Constructs approach is structured to find both strong conviction buys and sells and serves both hedge funds and mutual funds, it should be no surprise that the most successful stock recommendations provided by New Constructs over two of the last three years have been short ideas. This is simply a function of past market conditions. During the height of the Lehman and Bear Stearns debacles, short trading was vilified in both the US and the UK. So it is interesting to see that Congress and other bodies are now finding that research that can produce solid short ideas is also well suited to detecting misleading financial accounting practices at the company level.