Published on September 23, 2007
Nine Warning Signs of a Stock’s Decline
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Sign 1: Earnings Slow Down or Head South Profit is the lifeblood of a company. The lack of profit is a sign of a company's poor financial health. Watch the earnings. Are they increasing or not? If they aren't, find out why.
Sign 2: Sales Slow Down Before you invest in a company, make sure that sales are strong and rising. If sales start to decline, that downward motion ultimately affects earnings. Although the earnings of a company may go safely up and down, sales should consistently rise.
Sign 3: Exuberant Analysts Despite Logic Too often, analysis give glowing praise to stocks that any logical person with some modest financial acumen would avoid like the plague. Why is this? In many instances, there is, alas, a dark motive (or something not so dark such as ... ugh ... stupidity).
Sign 4: Insider Selling Heavy insider selling is to a stock what garlic, sunrises, and crosses are to vampires: an almost certain sign of doom! If you notice that increasing numbers of insiders are selling their stock holdings, you can consider it a red flag.
Sign 5: Dividend Cuts Of course, if a company is having modest financial difficulty, perhaps a dividend cut is a good thing for the overall health of the company. However, usually analysts see a dividend cut as a sign that a company is having trouble with its earnings or cash flow. In either case, a dividend cut is a warning sign that trouble may be brewing for the firm as it becomes ... uh ... less firm.
Sign 6: Increased Negative Coverage Take the negative reports as a signal to further investigate the merits of holding on to the stock or as a sign for selling it so that you can make room in your portfolio for a more promising stock choice.
Sign 7: Industry Problems Sometimes being a strong company doesn't matter if that company's industry is having problems; if the industry is in trouble, the company's decline probably isn't that far behind. Also, try to be aware of industries that are intimately related to your industry.
Sign 8: Debt Is Too High or Unsustainable Excessive debt is the kiss of death for a struggling company. We still get a kick out of reading an old issue of a financial magazine that listed the defunct company the year before its demise as one of ten stocks "for the long haul!" Yikes! Writers like that end up getting hobbies like hang-gliding during hurricane season.
Sign 9: Funny Accounting: No Laughing Here! Understanding a company's balance sheet and income statement, and making a simple comparison of these documents over a period of several years, can give you great insights into the company's prospects. You don't have to be an accountant to grasp key concepts.
Source of Reference : Paul Mladjenovic , Stock Investing for Dummies , Willey Publishing
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