The one customer that does not shop around

Joel Litman’s Altimetry presentation, which we reviewed in full here, makes a specific claim about where his forensic accounting system works best. The distortions between reported numbers and real economic value, he says, are “widest, loudest, and most reliable in government-adjacent companies.”

The reason is structural. Government contractors share three characteristics that standard accounting rules handle badly. They grow by acquisition. They pour money into research and development. They sign contracts that run 10, 15, or 20 years.

Accounting rules written a century ago for steel mills and railroads do not know what to do with any of those activities. The result is that government-adjacent companies often look less profitable on paper than they are in reality, which creates an opportunity for investors who can see through the distortion.

The Generac example

Generac makes backup generators. In 2019, Wall Street had it priced as a boring business. But Litman’s system showed the real numbers were roughly 3 times better than what the official accounting revealed.

The catalyst was the grid. The country was getting more dependent on electricity every year, and the grid was getting less reliable. California was running rolling blackouts in real time. The government was about to spend enormous money fixing it.

Generac was perfectly positioned. It sold the backup systems that homeowners and businesses needed when the grid failed. The government spending on grid resilience was a tailwind, and the company’s real profitability was hidden behind accounting distortions that made it look like a mediocre business.

The stock went from around $90 to nearly $500, a 447% gain. The market eventually recognized what the real numbers showed, but the gap between the official story and the economic reality persisted long enough for investors who saw it early to make a substantial return.

The Oracle example

Oracle is a different case. When Litman analyzed it in March 2021, Oracle was already a well-known company that Wall Street respected. The reported numbers showed earnings of about 31 cents on every dollar of assets, which is elite.

But Litman’s system put the real number closer to 38. Even a company Wall Street already admired was quietly better than its own filings let on. And the government connection was the key. Oracle’s cloud was being positioned to run the government’s most sensitive work, the Defense Department and the intelligence agencies. These are contracts that do not expire and a customer that does not shop around.

A top-grade business with government revenue built into the foundation, and a market not fully paying for either. Since the 2021 finding, Oracle’s stock has climbed as high as 418%.

The IQVIA example

IQVIA is the most dramatic case. In April 2020, at the absolute market bottom when everyone was panicking, Litman found one of the largest distortions he has ever seen in his career.

The reported return on assets was 2%. The real number was 75%. The old accounting rules were off by a factor of nearly 40. And the government piece? IQVIA was running the data backbone for the federal COVID-19 trials, with durable government contract revenue completely hidden under the accounting.

The stock produced a 218% gain in just over 12 months. Wall Street was looking at a company earning 2 cents on the dollar when it was really earning 75, and Litman’s system caught the gap at the moment when the market was most aggressively mispricing it.

The Moderna example

Moderna was hand-selected by the government to create a vaccine during COVID. Under conventional accounting rules, all you could see was losses. A business burning cash on a vaccine that did not exist yet. But the old rules treat research spending as money set on fire. Litman’s system treats it as what it actually is: an investment building toward something.

While everyone else was staring at losses and trying to guess how the vaccine race would shake out, Litman’s numbers showed earnings inflecting from negative to positive that year. The stock had already run nearly 250% off the March bottom, but on the real numbers, it was still trading for cheap. Moderna eventually soared as high as 449%.

Why government contracts create distortions

The pattern across all four examples is the same. Government contracts create accounting distortions because they have characteristics that standard accounting rules do not handle well:

Long duration. Government contracts can run for decades. Standard accounting recognizes revenue over the contract life, but the market tends to value the near-term revenue more heavily, creating a gap between the reported numbers and the real long-term value.

Research intensity. Government contractors in defense, healthcare, and technology invest heavily in R&D. Standard accounting treats R&D as an expense, reducing reported earnings. But R&D is an investment that builds future value, and treating it as a cost makes these companies look less profitable than they are.

Acquisition-driven growth. Government contractors often grow by acquiring other companies. Acquisitions create goodwill and intangible assets on the balance sheet, which standard accounting handles inconsistently, often making the combined entity look less profitable than the real economic picture warrants.

The Second Declaration connection

The connection to the broader thesis is direct. If the government is about to pour trillions into rebuilding American manufacturing, as we explore in our American manufacturing analysis, the companies receiving that spending are exactly the companies where Litman’s system has the most edge.

The CHIPS Act committed $52 billion to domestic chip manufacturing. The Pentagon invested $400 million in MP Materials and bought 10% of Intel. Lithium Americas and Trilogy Metals received government backing for critical minerals and copper.

Every one of these companies fits the profile: government-adjacent, acquisition-driven, research-intensive, with long-duration contracts. Every one is the kind of company where standard accounting rules produce numbers that understate the real value.

The investment framework

For investors, the framework is straightforward. The companies most likely to benefit from the $10 trillion shift are the companies that do business with the government in the sectors being rebuilt: defense, chip manufacturing, rare earth refining, shipbuilding, and infrastructure. These are the companies where the accounting distortions are widest, and where the gap between the reported numbers and the real value creates the most opportunity.

Litman’s specific picks sit behind the Hidden Alpha subscription, and as we note in our review, the value proposition is the subscription, not the ticker. But the framework, identifying government-adjacent companies where accounting rules hide real value, is a legitimate investment approach that investors can apply themselves.

NewsletterVetter is an independent publication. We receive compensation from some of the services we review through affiliate links. Nothing on this site is investment advice. Always do your own research.