Actionable insights — Haymaker Daily: Lies, damned lies, and earnings
The repeatable analysis behind the note: not that the market is overvalued, but how to measure it honestly — value on cyclically-adjusted cash flow, add excluded costs back, strip out capex-timing and non-cash-gain distortions, then rotate toward the sectors not playing the games — written so each check can be rerun on any market or single name.
How to read this page: each insight is a method — the earnings-quality diagnostic to run before trusting a reported P/E, at the index or single-stock level. The boxed line shows how it played out in this post. (Written newsletter — "read" links open the source post; no timestamps.)
1. Value the market on cyclically-adjusted cash flow, not reported earnings
The repeatable method
- Start from the premise "earnings are an opinion; cash is a fact" — reported earnings embed accounting choices; cash flow is harder to manufacture.
- Re-run your valuation yardstick (CAPE-style, i.e. smoothed over a cycle) on cash flow instead of earnings, and compare the two readings.
- Treat a large gap between the earnings-based and cash-flow-based valuation as the measure of how much accounting is flattering the picture — the wider the divergence, the more caution is warranted.
Here: Gerard Minack shows the US is "far more highly priced on a cyclically adjusted cash-flow basis" than on earnings — Hay's whole point is that "rarely have opinions and facts so dramatically diverged." The cash-flow lens reveals overvaluation the earnings lens hides.
Watch for
- Any market or stock where the earnings multiple looks tolerable but the price-to-free-cash-flow multiple is extreme — that gap is the warning.
2. Add excluded costs (SBC) back before you trust a P/E
The repeatable method
- Check whether the "earnings" you're being quoted are GAAP or an adjusted/Street figure that excludes real expenses.
- The usual culprit is share-based compensation — a genuine cost (it dilutes shareholders) that adjusted numbers often strip out; add it back.
- Recompute the multiple on the cost-inclusive figure; if the "cheap" P/E only exists because a real expense was excluded, the cheapness is an illusion.
Here: Hay flags "significant expenses, like share-based compensation, often being excluded from Wall Street earnings estimates" as a prime example of the "creative accounting" inflating reported profits.
Watch for
- Heavy SBC as a share of revenue; a wide, persistent gap between GAAP and "adjusted" EPS — especially in tech, where both are largest.
3. Separate capex timing — cash hit now, income-statement hit later
The repeatable method
- For capex-heavy names, remember the asymmetry: capital outlays depress cash flow immediately, but reach the income statement only gradually as depreciation.
- So a big spending wave can leave reported earnings looking fine for a while, even as free cash flow is being consumed — the P&L lags reality.
- Anticipate the "reckoning": as the spending matures, rising depreciation (and any impairments) hits earnings later, right when the cash has already gone.
Here: hyperscalers projected to spend "some $750 billion this year alone" on AI build-out; those outlays "are depreciated over time but the hit to cash flow is immediate," so "there will be a time of reckoning as this unprecedented cap ex starts hitting corporate income statements."
Watch for
- Capex growing far faster than depreciation; free cash flow diverging downward from net income; guidance that leans on "it's an investment" to explain shrinking cash generation.
4. Scrub non-cash gains — and circular customer/investment loops
The repeatable method
- Strip out non-cash, mark-to-market gains booked on stakes in private/loss-making entities — they are paper profits, not cash earnings.
- Flag circularity: when the company holding the stake is also a major supplier to that loss-maker, the same dollars can inflate profit twice (a marked-up investment plus booked revenue).
- Discount reported earnings by these items, and watch the pipeline of such loss-makers heading to IPO as future stock supply.
Here: "massive non-cash gains on investments in loss-generating entities like Open AI" inflate profits while the real "red ink… is astronomical"; the treatment is "even more aggressive" because these start-ups "are often major customers of companies such as Microsoft" — the circular loop.
Watch for
- "Gain on investments" swinging reported profit; an investee that is also a named customer; a wave of loss-making private companies "vectoring to go public."
5. Rotate toward the sectors not playing the games
The repeatable method
- Having identified where the accounting distortions concentrate (here, mega-cap tech), look for the opposite: sectors whose earnings are more cash-backed and whose multiples are undemanding.
- Prefer areas where reported profit and cash flow track closely — less SBC, less mark-to-market, more tangible output — as the "reasonably priced" alternative.
Here: "there is a long list of reasonably priced U.S. stocks that are not playing such earnings augmentation games. The financial and energy sectors are particularly bargain rich." (Dovetails with the same-week energy call in the July-14 Daily.)
Watch for
- Sectors trading at low multiples on cash as well as earnings; financials and energy screening cheap while tech screens dear on the cash-flow lens.
Methods distilled from the paid Haymaker newsletter (text in transcript.txt) for personal study. Not investment advice. © Haymaker / David Hay for source material.