Mosaic Theory for Stock Picks (Part 2)
Trends in gross margins, changes in important provisions, new competition, fixed cost increases, exaggerated current asset reporting, and legislative changes, are the six most important spokes on which the Mosaic Theory revolves, to predict a future stock quote. A company has choices of managing costs or of asking customers to pay more for products and services, but a declining trend in the gross margin on either account, is asking for trouble. Such stocks deserve to be sold short and should have no place in any portfolio unless executives execute immediate and effective correction plans.
Rumblings of litigation and product liability start well before they rise in public awareness. They are worth close tracking because they can sap a company of all its reserves. New competition is easy to spot, but executives are generally over-confident, and tend to be dismissive about such matters. Investors should make sanguine evaluations about such developments. Personnel cost increases are the ones which are most difficult to reverse, so investors should avoid stocks in which this happens regardless of short term margin trends. The sub-prime crisis of 2007 must have made stock traders everywhere wary about reported debts, but the same principle of hidden losses may lurk in inventory accounting. Deliberations in Congress and Presidential vetoes can swing stocks either way, so investing calls for considerable political guile!
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