Red Flags
Hewitt Heiserman, author of "It's Earnings That Count," (mentioned previously), weighs in on the exit strategy discussion from earlier. While I have a few rather different strategies use in temrs of price action, I particularly appreciate Hewitt's Fundie metthods of getting out of dodge:
| Stock price | Sell 50% if stock drops 15% below purchase price; sell other 50% if drop 25% | |||||||||||||||||||||
| Write down in notes sell points | ||||||||||||||||||||||
| Income statement | Earnings announcement falls short of consensus | |||||||||||||||||||||
| (studies indicate the effects for as long as a year after the announcement) | ||||||||||||||||||||||
| Last two quarterly earnings growth slow | ||||||||||||||||||||||
| Other revenue rises without explanation (especially if company uses distributors for international sales) | ||||||||||||||||||||||
| Same store sales down 3% in last quarter | ||||||||||||||||||||||
| New store results are disappointing | ||||||||||||||||||||||
| Earnings miss unless a one-off, temporary problem (the first disappointment usually followed by another miss) | ||||||||||||||||||||||
| Company announces worse-than-expected earnings | ||||||||||||||||||||||
| Options, additional share offerings, conversion of convertible bonds result in massive dilution for existing stockholders | ||||||||||||||||||||||
| Strategic | Big price cuts on flagship products which does not result in market share increases | |||||||||||||||||||||
| Company embarks on acquisition spree | ||||||||||||||||||||||
| Company buys another company in an industry they know nothing about | ||||||||||||||||||||||
| Company using acquisitions to bolster revenue growth | ||||||||||||||||||||||
| Change in business model; e.g., switch from all-company-owned store structure to franchise | ||||||||||||||||||||||
| Market is closing; e.g., Dayrunner organizers when PDA's became popular | ||||||||||||||||||||||
| Valuation | P/E ratio of 30, when most optimistic projections of earnings growth are 15-20% for next few years | |||||||||||||||||||||
| Company sells at higher P/E than its growth rate? | ||||||||||||||||||||||
| No room for minimum 5% annual returns next 3-5 years | ||||||||||||||||||||||
| Is P/E ratio greater than 1.5x the market's multiple? | ||||||||||||||||||||||
| Technical | Relative price strength trending down | |||||||||||||||||||||
| Company in a lagging industry as measured by industry relative strength (source: IBD) | ||||||||||||||||||||||
| No support at 50-, 200-day moving average | ||||||||||||||||||||||
| Is company breaking down badly and not rallying well vis-à-vis the S&P 500, Dow and Nasdaq? | ||||||||||||||||||||||
| (William O'Neil 4/04 issue of AAII Journal found when market leader finally tops, it will decline avg. 75%.) | ||||||||||||||||||||||
| Money flow or accumulation/distribution index deteriorate | ||||||||||||||||||||||
| Compare a stock's money flow on a relative basis and compare its current level to historical norms (Bloomberg, BigCharts) | ||||||||||||||||||||||
| Industry market leaders are topping out | ||||||||||||||||||||||
| After months of significant price advance, a stock runs up faster than normal in just one or two weeks | ||||||||||||||||||||||
| Stock shows downside gaps, usually indicating many institutional sellers present. | ||||||||||||||||||||||
| Stock exhibits deteriorating relative strength, suggesting the stock is beginning to lag the overall market. | ||||||||||||||||||||||
| Earnings fall short of expectations or fundamental strength deteriorates. | ||||||||||||||||||||||
| Stock | Splits for the second time in less than 12 months | |||||||||||||||||||||
| Secondary offering priced at discount to current stock price and carries warrants that can dilute EPS even more | ||||||||||||||||||||||
| (Sharp underperformance of companies following secondary issue) | ||||||||||||||||||||||
| Private offering in convertible notes because it dilutes earnings per share | ||||||||||||||||||||||
| Company with large cash flow keeps buying its stock back at rich multiples as growth in organic revenue slows | ||||||||||||||||||||||
| Management | Best story is stock performance rather than business. | |||||||||||||||||||||
| Top executives and some key employees go to rival firm | ||||||||||||||||||||||
| New management team that hasn't proved its bona fides | ||||||||||||||||||||||
| Business conditions described as "challenging" | ||||||||||||||||||||||
| Investment banker hired (are they trying to protect their cushy jobs?) | ||||||||||||||||||||||
| Company files extensions for reporting earnings | ||||||||||||||||||||||
| Other | New competitors entering the market? | |||||||||||||||||||||
| Customers changing spending habits? | ||||||||||||||||||||||
| Price war erupted in industry? | ||||||||||||||||||||||
| How are other companies in same industry doing? | ||||||||||||||||||||||
| (Red flag when one company in industry doing much better than its peers) | ||||||||||||||||||||||
| Cut losses short, as they can be overcome. Big losses do severe financial/psychological damage that are harder to recover from. | ||||||||||||||||||||||
| Stores | Decline average weekly stores sales | |||||||||||||||||||||
| Other: | Management significantly reduces sales, earnings forecasts | |||||||||||||||||||||
| Competitor says business is tough | ||||||||||||||||||||||
| Negative same-store sales growth | ||||||||||||||||||||||
Wednesday, February 23, 2005 | 11:57 AM | Permalink
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The Big Picture has an interesting set of posts on selling strategies.
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Something wrong with the formatting here. I am having a hard time in Firefox on OSX. Just this last post.
Posted by: jjr | Feb 24, 2005 4:47:25 AM
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