The Secret Behind Joel Litman’s Winning Investments: Earnings Quality

April 27, 2023

Are you baffled by the success of some stock market investors? Are you confused why some seem to win time after time while others can’t catch a break? According to some world-renowned figures, like forensic accounting trailblazer and stock guru Joel Litman, the secret sauce lies in “earnings quality.” 

Joel Litman’s a CFA, CPA, and author. As CEO of Valens Research and Chief Investment Strategist for its consumer arm, Altimetry Research, Litman’s sought-after insights on earnings quality and picking winning investments shine through in his popular monthly stock newsletter, Hidden Alpha.

However, that only provides a bird’s eye view of who Joel Litman is and how he picks winning investments. There’s much to uncover about how earnings quality and Litman’s insights can become your top investing weapon. 

The Magic of Forensic Accounting and Uniform Accounting

The Magic of Forensic Accounting and Uniform Accounting
The Magic of Forensic Accounting and Uniform Accounting

A distinguished forensic accountant, Joel Litman excels in analyzing financial statements using accounting, auditing, and investigative skills. His expertise in assessing earnings quality uncovers hidden opportunities and risks often overlooked by traditional investors.

Litman’s pioneered Uniform Accounting, which transforms how investors perceive a company’s financial health. By thoroughly examining financial statements, it uncovers hidden assets, liabilities, and other vital elements, providing a comprehensive view of a firm’s financial position and identifying undervalued opportunities and emerging market trends.

For example, Litman’s recent recommendation to invest in natural gas highlights his exceptional ability to identify profitable prospects and earnings quality through Uniform Accounting.

Moreover, in his promo, “Steve Jobs’ Final Prophecy,” Litman further demonstrates Uniform Accounting’s ability to predict a company’s earnings and profits accurately. One example in this promo is his forecast on Illumina. His research indicates a 20% increase in value within a year, 40% in two years, and a remarkable 130% in five years for this biotech leader.

Earnings Distortions: The Secret Sauce of Earnings Quality and Stock Picking

Earnings quality is a game-changer in stock picking, and Joel Litman has built his career on uncovering this hidden potential. But there’s one specific ingredient that helps discover winning investments by using earnings quality –earnings distortions. 

Earnings distortions are concealed inconsistencies in a company’s financial statements. By spotting these distortions, Litman brings the true nature of a company’s earnings quality to the light, giving investors an edge. Moreover, the larger the distortion, the greater the potential gains often are. 

Below, we’ll discuss a few intriguing examples from Litman’s career. You can find even more examples in his promotional piece, “​​How to Profit From Financial Disaster in 2023.

The Financial Crisis 

Back in 2009, during the financial crisis, Joel Litman utilized his proprietary methodology to evaluate financial statements and adjust financial metrics for accounting distortions. This approach allowed him to determine a company’s true economic earnings and accurately predict stock performance even in turbulent times. For example, Litman recommended Timberland, Hanesbrands, Liz Claiborne, and Skechers in 2009, leading to gains of 301%, 445%, 878%, and 1,566%, respectively.

SolarEdge: Capitalizing on Earnings Distortions and Market Trends

In 2019, Litman turned his attention to SolarEdge, a solar energy company. He discovered that the company’s true earnings were nearly three times higher than Wall Street’s reported figures. Additionally, 2019 saw a surge in renewable energy consumption in the U.S. Capitalizing on this earnings distortion and market trend could have positioned investors to more than triple their money.

Netflix: Uncovering Hidden Earnings Quality

Despite initial skepticism from some analysts, Litman’s system revealed that Netflix’s true earnings had been consistently higher than Wall Street’s reported numbers for decades. Investors who accessed this information and acted on it could have made a staggering 63,727% gain, turning a $5,000 investment into $3.1 million.

Earnings Quality and the Importance of Cash Earnings

Litman emphasizes that cash is king when evaluating a company’s earnings quality. Spotting earnings distortions and true cash earnings is critical for investors looking to gain an edge in the market. For instance, his system detected a 110% earnings distortion in Penn National Gaming in 2010. Those who invested and held onto their shares could have made up to a 1,785% gain.

Earnings Distortions and the Pandemic Bull Run

During the 2020 bull run, Litman’s system identified companies with significant earnings distortions, such as Moderna and RCI Hospitality. As a result, these companies experienced gains of more than 100% and up to 464%, respectively, showcasing the importance of detecting earnings distortions to make informed decisions.

United Airlines: Unearthing Hidden Earnings Potential

In 2009, Joel Litman found a significant discrepancy in United Airlines’ earnings using forensic accounting. Wall Street reported a 0.8% Return on Assets. Litman revealed that the earnings from the acquisition of Continental Airlines were not included in the income statement, amounting to $764 million. Thus, Litman found that United’s earnings were almost four times higher than reported. 

United Airlines: Unearthing Hidden Earnings Potential
United Airlines: Unearthing Hidden Earnings Potential

Zoom: Identifying a Game-Changer Before It Exploded

Joel Litman’s system detected an 814% earnings distortion in Zoom as early as its 2019 IPO, well before the first known COVID case and the demand for video conferencing soared. This insight would have allowed investors to capitalize on Zoom’s untapped potential before it gained almost 1,500% from its IPO price to its October 2020 peak.

Why Trust Joel Litman?

Why trust Joel Litman? Just ask Matt Rakowski, former head of credit at Goldman Sachs, who credits Litman’s forensic-based research with “significant gains” in his portfolio. Harvard Business School’s Professor John Sviokla also acknowledges the uniqueness of Litman’s insights.

Joel Litman’s impressive track record has caught the attention of top publications like CNBC, Barron’s, Institutional Investor, and Forbes. Prestigious institutions like the Marine Corps War College and the FBI Nationwide Forensics Conference have invited him to share his expertise. Additionally, The Pentagon, of all places, has asked Litman to speak to high-level military brass five times in the past year. 

If the Pentagon trusts him, perhaps he’s reasonably trustworthy.  

Furthermore, 10 of the world’s largest money managers and over half of the 300 most prominent financial firms trust Litman’s insights. Some clients even pay over $100,000 a month for his services.

Underscoring the real-world impact of his expertise, Litman has also taught or guest-lectured at esteemed institutions such as Harvard Business School, U Chicago Booth, Wharton, LBS, and SAIF Jiao Tong.

The Key Takeaway  

Joel Litman’s investing acumen is deeply rooted in his understanding of earnings quality. As a result, he consistently uncovers hidden gems with long-term growth potential.

Litman’s approach teaches us two fundamental lessons. Number one is to explore deeper into financial statements. Go beyond surface-level metrics and analyst recommendations. Number two is to be cautious of aggressive accounting practices, such as revenue recognition, capitalization of expenses, or off-balance sheet transactions, which may signal low-quality earnings and elevated risk.

To fully embrace these principles, consider subscribing to Joel Litman’s Hidden Alpha newsletter. This exclusive, monthly stock research service provides forensic research typically accessible only to hedge funds and large money managers. In the palm of your hands, you could have small stock picks whose returns have more than doubled the S&P stock market averages over the past year and a half or Top 10 “Buy Now” picks that have outperformed the S&P 500 index by nearly 100%. Plus, with our exclusive link it will only cost you $4 per month to get started!

By honing your focus on earnings quality and leveraging the insights provided through Litman’s Hidden Alpha newsletter, special reports, and countless other resources, there’s no reason why you, too, can’t discover winning investments.

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