Danger Zone: Cabot Oil & Gas

In the Danger Zone this week is Cabot Oil & Gas (COG).

This stock is also on my Most Dangerous Stocks list and gets my Very Dangerous rating. It makes that list because (1) the company reports positive and rising GAAP earnings while economic earnings are negative and declining and (2) the valuation is sky high.

COG's GAAP earnings move in the opposite direction of their economic earnings because of balance sheet issues:
1. $857mm in net deferred tax liabilities
2. $17 million in off-balance sheet debt and
3. $313 million in accumulate asset write-downs. The $313 million in asset-write-downs is a indicator of management's inability to create shareholder value. I call that management failure given that management's primary responsibility to shareholders is to create value and be good stewards of capital, not destroy it. Here is more on write-downs as indicators of managment failure.


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