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Shed Such Stocks Now

30 may 2008 - Features - Editor

There could be more Bear Stearns around the corner. How can you spot bankruptcy in time? Here are five tell-take signs:

1. Derivative dangers: excellent companies stick to knitting. They keep business simple. Key drivers of success are managed with focus and excellence. Speculation is limited to sourcing strategic materials at optimal prices. Controls are in place to spot malfeasance quickly.

2. Evasive executives: risks and downsides are elaborated in detail and transparently. There is no attempt to ‘over-sell’. Company brands rather than individuals are projected. Executives communicate openly and frequently. They work to keep your trust. The focus is on the controllable, with little time spent on excuses.

3. Cash crunch: this is simpler. It is a matter of math. Internal accruals are mainstays. The promoter and key executives have major stakes as well. The company does not fight shy of buying its own stock. Funds from external sources are stable, and committed with adequate understanding of the business and its uncertainties.

4. Failed forecasts: projections include most likely and worst case scenarios. Executives do not pretend to be sure of what the future may hold. Assumptions are made explicit. Past investments are reviewed for actual returns as compared to original forecasts.

5. Outrageous optimism: projections are aggressive. Presentations are showy. There are no comments about risks and difficult issues. Discussions are carefully shepherded in a chosen direction.

Look through your portfolio with new spectacles. Business failures come with prior warnings. You must learn to listen.

 


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