JOE: Yep. They didn’t want people like me around, because we brought a heightened level of scrutiny to their business. I even got thrown out of a meeting with Bernie Ebbers. MOLLY: The name sounds familiar… JOE: He founded telecom giant WorldCom in 1995. Our investors were pressuring us to buy. The stock was soaring and our clients thought we were missing out. Telecom firms had embarked on a historic
MOLLY: A negative cash conversion? How is that possible? JOE: It means they were probably losing money just to keep the lights on. And sure enough, the stock went on to crash 92%.
That was 20 years ago, but this cash number matters now more than ever, Molly. In a bull market, people are OK to just
race to get the world online by building out fiber-optic networks… And to most people, WorldCom looked like a winner…
“buy the story.” But when markets get choppy, like we’ve seen this year, big investors start to get picky about the stocks they’re willing to put money into. They don’t want to hear some fancy story about how the company is going to change the world. They want real cash earnings. So back then – just like today – we were looking for “evergreen” winners, as Marc put it. MOLLY: In other words, the companies that outlast the initial mania and continue for years to come… through every crash and sell-off… by minting cash quarter after quarter. JOE: Right. One of my biggest winners was Texas Instruments. It’s a huge part of how I paid for my house. They produced the world’s first silicon chip. Take a look… The stock is up 8,400%
MARC: The stock had shot up 6-fold by the end of 1999… JOE: Yep. But WorldCom got very upset with me when I questioned how they made money. I was seeing a lot of red flags with certain of their numbers, particularly in something known as their “accruals”, which overstating their earnings by some $11 billion to keep their stock up! It’s one of the biggest financial frauds in the history of the stock market. And old Bernie got 25 years in jail after his company collapsed in an epic bankruptcy. MOLLY: Incredible… So WorldCom would have earned an “EQ Low” rating on the Power Gauge, I assume… MARC: Well, it’s hard to see outright fraud like WorldCom unless you’re on the ground like Joe was at the time. Sadly, most companies bury their numbers. And hope that investors don’t have the time or the sophistication to understand what’s really going on. It’s the oldest game on Wall Street. Consider Ciena Corp, for instance. On November 1, 2000, the stock lit up the changed from quarter to quarter. And boy, I’m glad I stayed on the sidelines… Because they later admitted to
overall – through the 1987 crash, the dot- com crash, the 2008 crash, the 2020 crash, 2022 and more. That’s what an “EQ High” winner
looks like on the Power Gauge. In fact, the appropriate response during EVERY SINGLE ONE of those sell-offs was to buy more! MARC: Of course, the big question is… What do all these companies have in common? MOLLY: Lots of cash! The REAL Winners in Every Boom
Power Gauge with an “EQ Low” rating in our study. That was with a NEGATIVE 70% cash conversion.
JOE:
You got it, Molly.
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