Michael Castor: The Accounting Game

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Michael Castor of Sio Capital is up next.

Castor talked about a Mexican small-cap stock called Genomma Lab (LABB.MX). Genomma is a healthcare company that trades in Mexico and has a valuation of $30 billion pesos, or $2.3 billion U.S. dollars.

There are several things to like about Genomma: It has healthy operating margins – 25%-plus – for the past five years. Net income of 5.2 billion pesos.

Genomma is similar to U.S. companies Unilever (NYSE: UN) and Colgate-Palmolive (NYSE: CL). It has a diverse array of healthcare products.

Revenues are growing – 1.8 billion pesos per year the last five years. Working capital is also increasing.

However, and this is the catch: cash flow is decreasing – mostly due to accounting irregularities. Cash flow from operations was only 1.8 billion pesos last year. The discrepancy between Genomma’s revenue and net income growth and its cash flow decline is an accounting anomaly that, Castor says, may require the company to restate earnings.

And it's why Castor is short-selling Genomma.

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