Lo and behold! More reaffirmations of the dreaded stock market crash are pouring in. This time it’s the famous business magnate and investment guru Carl Icahn sending a “Danger Ahead” warning to the market. In a dramatic, documentary-style video released on his web site this week, Icahn can be seen vehemently criticizing Capitol Hill and Wall Street for the present state of the economy and capital markets, saying he foresees a stock market crash sooner than later. According to him, the question now is not whether it will happen but when it will happen. (Source: Carl Icahn, last accessed October 2, 2015.)
Here are a few takeaways from Icahn’s video that can help investors in identifying dubious investments.
- Be wary of companies doing massive buybacks. You might want to check important metrics like whether the company has excess cash and low debt to warrant a buyback. Otherwise, beware! He calls it a “short-term fix” that weakens the balance sheet.
- Watch out for companies involved in mergers or acquisitions. Analyze where the finances for the acquisition are coming from and whether such ventures are truly creating any synergies. Companies that are choosing to make acquisitions by borrowing at the current low rates instead of using the borrowings in building up tangible assets, investing in employee productivity, or venturing into growth and expansion, raise red flags. Icahn likens such corporate behavior to taking a hit, having short-term ecstatic effects but long-term distress.
- When looking at corporate earnings guidance, take GAAP figures instead of non-GAAP or unadjusted figures which ignore many intangible costs. GAAP is a more transparent measure of whether earnings have truly increased. According to Icahn, we are witnessing an “earnings mirage” where corporate earnings guidance conveniently ignores stock compensation, restructuring costs, amortization costs associated with intangible assets, and takeover costs; thus reporting exaggerated earnings.
- Look out for labor and capital conditions in the company. Old, depreciating property, plant and equipment and low spending on employee productivity translate into a troubled company. Steer clear of it!
Icahn mentions a number of factors contributing to an overheated market that, according to him, is headed for a freefall. He counts the high yield/junk bonds market, a discriminatory tax system, an inappropriate Fed policy of low interest rates, and particularly an artificial corporate “earnings mirage” amongst the reasons. Icahn is of the view that instead of building something tangible, companies are now resorting to financial shenanigans to report inflated earnings.
You can watch Carl Icahn’s full video here.