Red Flags

Wednesday, February 23, 2005 | 11:57 AM

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 | Comments (2) | TrackBack (1) add to | digg digg this! | technorati add to technorati | email email this post



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» Sell Strategy from AnumatiNews
The Big Picture has an interesting set of posts on selling strategies. The author first presents... [Read More]

Tracked on Feb 23, 2005 5:56:54 PM


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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