The Torpedo Watch™ philosophy is simple:
Stock prices will eventually reflect the fundamental
performance of the company. While analysts and company
management may be talking a great story or reporting
misleading financials, our rating system is designed to cut
through the spin and find some measures of truth which will
determine future prices. This information is available in
published financial statements. None of these indicators we
use involves a single data point provided by analysts, so it
is strictly independent of analyst views.
Torpedo Watch™ is designed to help improve investment
performance by identifying stocks whose fundamentals are
deteriorating by selling them (or shorting them) before
prices fall. The Torpedo Watch™ process is similar to an
annual physical examination when a doctor measures your
blood pressure, heart rate, blood chemistry, listens to your
breathing, and takes x-rays and other pictures required.
We apply the same principles to companies. Torpedo Watch™ can
determine whether the stock may be sick or coming down with
a problem that may jeopardize its financial health. Torpedo
Watch has identified fives causes that may result in a
warning in our rating system:
- Aggressive accounting
- Deteriorating financial condition and the hiding of liabilities
- Significant change in operating performance due to industry fundamentals or the company's
- Bad acquisitions
becomes an issue when the stock price gets ahead of its
fundamentals. This is often due to investors believing that
the company fundamentals will keep growing at a faster rate
than its competitors, markets and/or its industry. The
downward spike in price after overvaluation has been
achieved can be sudden and often violent, significantly
Aggressive accounting has become a serious problem in recent
years and is often missed by investors because it requires
sweat and toil to decipher the financial statements.
Deteriorating financial conditions can be present even if a
company is showing strong revenues and earnings. Often it
may seem everything is okay, but the cash is draining away
and balance sheet is piling up with weaker assets. The
failure to disclose off balance sheet items would fall into
A significant change in operating performance has caused
many a stock price to fall. A company which sees its
competitive advantage taken away will often be forced to
lower both its gross and operating margins to continue to
maintain its market beachhead. Likewise, the company may be
forced to drop prices causing revenues to fall.
Bad acquisitions are a by-product of the 1990s when
companies believed they could purchase another company and
improve profits due to the "synergy" of one combined entity.
Many times, these were bad decisions that brought down stock
We have organized our torpedo warnings into five categories
that combine all the 50 measures we look at in reviewing a
- Investment Quality
- Cash Flow Quality
- Earnings Quality
- Balance Sheet Quality
Investment Quality measures the operating efficiency and
profitability of the company and includes indicators such as
turnover, margins and returns.
Cash Flow Quality examines the amount of real cash flow the
company generates from its business by adjusting for non
-recurring events, such as acquisitions or meeting liquidity
needs and other items.
Earnings Quality measures the durability of reported
earnings and what portion of those earnings is "core" to
ongoing operations and likely to be repeated. This quality
measure excludes one-time items and adjustments not part of
ongoing revenues and considers the amount of cash supporting
Balance Sheet Quality measures the changes in the amount of
key short-term assets and liabilities. This is where we
closely monitor a company to see if they have "cookie jar
reserves" hidden for a rainy day that can be used to enhance
Valuation enables one to observe whether a company's stock
price has gotten ahead of itself, by comparing it to the
market and the industry in which it operates. This is not a
useful measure by itself as companies can stay overvalued
for a long period of time. However, when combined with the
warnings from the other four quality measures listed above,
it is better than sonar in avoiding torpedoes.
For buy ideas, our reports identify companies whose five
measures are strong, not weakening as in the case of the
potential torpedo companies. These are companies with strong
fundamentals whose price is not out of line. Each month we
will recommend one or two long ideas to compliment Torpedo
Watch companies to avoid and to short.
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Torpedo Watch, Torpedo Watch Stock Tracker, and Torpedo Update are trademarks
and service marks of Jefferson Investment Management Company and are used
Torpedo Watch™ is for informational purposes only, and is not
a recommendation to buy, sell, or hold any security, or that
any investment strategy discussed is suitable for all
investors. Torpedo Watch is published by Superstock Investor, LLC.
As a publisher of a financial newsletter of general and
regular circulation, we cannot tender individual investment
advice. Only a registered broker or investment advisor may
advise you individually on the suitability and performance of
your portfolio or specific investments.
In making any investment decision, you will rely solely on
your own review and examination of the facts and the records
relating to such investments. Past performance of our
recommendations is not an indication of future performance.
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The editor, publisher, and directors of Superstock Investor, LLC
flatly promise no front-running. We will not initiate a
position in any option we have recommended for three business
days before our original recommendation and three business
days after any subsequent recommendation. We will not initiate
a position in any stock we have recommended for 3 business
days before our original recommendation and 3 business days
after any subsequent recommendation.
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subscribers bought and sold at the time the recommendations
were issued. Actual results can and do vary based on day of
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There is a very high degree of risk involved in trading. Past
results are not indicative of future returns. Torpedo Watch,
LLC and all individuals affiliated with Superstock Investor, LLC
assume no responsibilities for your trading and investment