Businesses in which you can't understand how they make so much money

[LongHaul]

Has anyone come across any businesses where you can't understand how they make so much money?

I am curious because some of them may be cooking the books.

 

Here are a few historical examples:

1.  Worldcom - reporting good profits while comps profitability declined drastically. 

2.  Gowex - comps losing money while Gowex nicely profitable.

3.  Chinese reverse takeover companies with high margins that later turned out to be frauds. 

 

 

 

 

[PatientCheetah]

I came across a stock recently - it is a product distributor, vastly higher margin relative to competitors, EPS growth driven primarily from margin expansion, account receivable growth far outpaces sales growth, corporate presentation touts growing dividend and cash flow while FCF barely exists... I plan to short it myself when it becomes technical more vulnerable

[Mephistopheles]

Valeant :D

[constructive]

King Digital (KING) - I understand why people would spend on entertaining mobile games, but these particular games seem to be terrible.

 

National Beverage Co (FIZZ) - It's a $2B drink company and I can't remember ever seeing one of their products in a store. Also, they have higher returns on equity than KO, PEP or DPS. I thought KO was supposed to have a huge scale/distribution advantage over smaller competitors?

 

I don't suspect either of these are cooking the books. If I don't understand something, the problem is probably as likely to be me as it is the company.

[boilermaker75]

When I looked at Enron's annual reports, which I did after they collapsed, I seem to recall they had several years of negative FCF. The negative FCF was on the order of $2 billion dollars per year for several years in a row before the implosion. So maybe Enron should have been obvious?

[mjohn707]

King Digital (KING) - I understand why people would spend on entertaining mobile games, but these particular games seem to be terrible.

 

National Beverage Co (FIZZ) - It's a $2B drink company and I can't remember ever seeing one of their products in a store. Also, they have higher returns on equity than KO, PEP or DPS. I thought KO was supposed to have a huge scale/distribution advantage over smaller competitors?

 

I don't suspect either of these are cooking the books. If I don't understand something, the problem is probably as likely to be me as it is the company.

 

The Big Shot soda exists, trust me!

[thepupil]

King Digital (KING) - I understand why people would spend on entertaining mobile games, but these particular games seem to be terrible.

 

National Beverage Co (FIZZ) - It's a $2B drink company and I can't remember ever seeing one of their products in a store. Also, they have higher returns on equity than KO, PEP or DPS. I thought KO was supposed to have a huge scale/distribution advantage over smaller competitors?

 

I don't suspect either of these are cooking the books. If I don't understand something, the problem is probably as likely to be me as it is the company.

 

LaCroix is everywhere and growing nicely.

 

http://www.bloomberg.com/news/articles/2015-08-12/how-lacroix-beat-coke-and-pepsi-in-the-sparkling-water-wars

 

http://mobile.nytimes.com/2015/03/08/magazine/letter-of-recommendation-lacroix-sparkling-water.html?referer=&_r=0

http://nypost.com/2015/12/03/sparkling-lacroix-sales-drive-acquisition-talk/

[DTEJD1997]

King Digital (KING) - I understand why people would spend on entertaining mobile games, but these particular games seem to be terrible.

 

National Beverage Co (FIZZ) - It's a $2B drink company and I can't remember ever seeing one of their products in a store. Also, they have higher returns on equity than KO, PEP or DPS. I thought KO was supposed to have a huge scale/distribution advantage over smaller competitors?

 

I don't suspect either of these are cooking the books. If I don't understand something, the problem is probably as likely to be me as it is the company.

I can assure you that FIZZ is no fraud...not at all.  I live a few miles from one of their large factories.  I also see their product EVERYWHERE.  I have had many, many, many gallons of their product over the years.

 

My life would also be DRASTICALLY different today if I held onto their stock that I bought in the very early 90's.  FIZZ has been one of the very best stocks to own through the years.  Look at their splits & dividends.

 

FIZZ is no joke, and they earn incredible returns, and have done this for years.

[LongHaul]

I buy LaCroix sparkling water and like it.  Fizz does seem like a ripoff though at a P/E of ~40x