Was I wrong about these two stocks? Too soon to tell

Here at Vox, I often explore the theme, particularly with my own work, of "wrong, or right too early?"

The question arises when things happen to make a forecast look particularly iffy – but there's still some chance, at least in my view, that it'll pan out in the end.

Two very recent, and rather strongly worded, columns on Exchange Income Corp. and Penn West Exploration Corp. are now in this category. And, to be sure, there are some who've decided the columns fall squarely into the former classification.

Let's see.

First, an August column on Exchange Income, the Winnipeg-based concern with the business model of acquiring industrial and aviation companies and passing along the profits to shareholders via dividend. I told you about the efforts of Veritas Investment Research, the Toronto firm that was deeply skeptical about the company's future prospects, particularly at its WesTower unit that constructs and operates cellphone towers. The folks at Veritas saw the fair value of Exchange Income shares at $8.50, not the $20 the stock traded at before their report.

The column had, it seems, a strong effect, with the shares down as much as 21 per cent on the day of publication. The company, in a self-imposed quiet period prior to its earnings, promised a response, which it delivered a week later along with surprisingly robust profits. "They predicted we couldn't fix WesTower," chief executive officer Mike Pyle told me. "I suggest to you our second-quarter results say that's not true."

The crux of the Veritas critique was that AT&T Inc. is making serious cuts in its capital spending budget in the second half of 2014, and WesTower would bear the brunt of them. But Exchange Income said Sept. 3 that AT&T renewed its contract for another three years, and it expected "no material changes to the services" it provides to AT&T. That announcement pushed the shares back over $20 for the first time since summer. (It has since retreated.)

As Veritas noted in a follow-up note, however, the AT&T contract has no announced dollar value and seems to have no guarantee. Veritas analyst Michael Yerashotis says that "given excess capacity in the industry, reduced AT&T spending and a contract with no minimum spend commitment, we expect WesTower to experience significant revenue and margin pressure going forward."

Mr. Pyle, in a recent e-mail to me, said WesTower is maintaining all the geographic areas of service it had before. The second-half revenue decline has "ABSOLUTELY NOTHING to do with the contract," he wrote, adding, "AT&T simply let out more work in the first half of the year than they did in the second half." And since the company does work for other carriers who still have a lot of network updates to do, "we expect to gain additional work, increase revenues and further diversify our customer base."

Here's my take: Congratulations to Exchange Income on the good second-quarter numbers. In early 2015, when we have the full results for this year, we can make a final accounting on this one.

Speaking of accounting, let's turn to Penn West. In early September, I wrote about how the company had $2-billion of "goodwill," an asset created after acquisitions. Companies need to periodically review their goodwill to see whether the assets they acquired can still generate the cash to support the balance-sheet entry. And Penn West, I said, might write down most or all of that $2-billion, creating a big net loss.

Except I decided to get a little too cutey-poo Nostradamus and explicitly say that this could happen as part of the company's imminent accounting restatement. When the company finished the cleanup of its books two weeks later … well, no, no goodwill writedown.

It's entirely possible the company didn't have time for such an exercise as it tried to nail down its correct income statement numbers, and we'll see a writedown as of its fiscal year end, when all companies are supposed to review goodwill.

Or maybe we won't see it at all. The evidence that a goodwill writedown is in order, including a depressed stock price, has been significant; analysts and the U.S. Securities and Exchange Commission have questioned how Penn West kept deciding it hasn't been necessary.

Perhaps it's best to say that Penn West should write down its goodwill, rather than trying to predict when – or if – it will do so. I'm comfortable with that argument always being right, no matter what the company may choose to do.