How to spot a 'rotten' stock...

[Bushman]

From today's Eureka Report ' 'Eight Ways to Spot a Rotten Stock'.

I have not repeated verbatime - just the eight 'danger will robertson' signs that you are holding a whiffy number in your portfolio.

1. Negative cashflows. Fairly self-evident; however best not to apply to a mining explorer, bio tech start-up etc. Cashflows are reported quarterly on the ASX so there really are no excuses.
2. Cap net debt to equity ratios at 50%. If you have more debt than shareholder assets (as measured by the balance sheet) then you have bodgy assets or are making losses or both. Insolvency or a cap raising at the very least is the result.
3. Check you Interest Coverage Ratio and make sure it does not go under 1.0x. Fairly self explanatory. If you can't meet your interest bill, your bank will be unhappy and call in the hatchet men.

LOL; have to go to lunch. Will be back with the other five (and some more) in the arvo.

Comments/ thoughts?

 

[Bushman]

..ok to quickly finish.

4. Avoid low ROE stocks. This ties into profitability so that makes sense.
5. Profit warnings are warning bells.
6. share price trend.
7. Insider trading i.e. directors selling.
8. Board and management re-shuffles.

A few more I would add as these seem mostly to be lagging indicators.
A. expansion into new and emerging markets.
B. exposure to 'rust belt industries' or emerging industries where capital needs/demands are not certain.
C. Cost of funding is more than ROE i.e. recent example of A-REITs.

That's about all I can think of now but it was a long Friday lunch.

Been thinking a lot about learning outcomes from the last 18 months and the Eureka checklist (whilst relatively straight-forward) seemed a good starting point.

Cheers B'm.