Learning Corner: Possible Warning Signs of a Rough Patch to Follow?
Have tried to pick stocks that will hopefully do okay for years. But guess since my investments will be in tax free accounts, selling will be an option as well (without having to worry about tax)?
Haven't found too many companies that grow exponentially year after year without things eventually cooling off for them - like Starbucks ... and possibly Apple? So was wondering ...
QUESTION: Are there sometimes maybe signs that a hot stock is starting to cool off a bit?
In the last thread, there were those 5 red flags that Sears was showing:
1. Decreasing share price
2. Decreasing (or negative) earnings
3. Increasing debt
4. Debt that's very large
5. Increasing interest from short-sellers
Maybe an early warning sign that a company may have hit a bumpy road is that a couple of those 5 things may still look fine, while a couple of them are starting to look not quite as solid?
Have taken a look at a couple of companies, but may need to look at several more to see what sorts of things may start to look different *before* the share prices might start taking a turn? As with poker, maybe things won't always be so clear?
So here's the first company ...
Example: Domino's (DPZ)
1. Share price - still increasing, not declining (declining would be bad)
2,3. Earnings still look fine, but Domino's debt level has increased (so the first is okay, but the second is not really great)
4. Apparently their debt level is starting to look a little on the high side too (not good)
5. Increased short-seller interest, decreased insider interest (not great)
This article was saying that the reason Domino's share price went down last year was because they missed earnings. And that the only reason their share price went back up is because they did an accounting trick of borrowing money to buy back shares:
Marketwatch: Why Domino’s Pizza stock may be poised for a fall (May 18, 2016)
In #2,3 it shows that they used the borrowed money to buy back shares - guess companies like to buy back shares because it decreases the number of shares on the market ... and that will increase the Earnings Per Share (EPS), when there's fewer shares? But guess stuff like increasing earnings, share buybacks, and paying out dividends are *supposed* be the result of a company that's prospering, not the result of a company that's borrowing money to get the numbers to look like that's the case?
This other article was also saying that strange accounting is oftentimes the first sign that a company might have started to stumble.
The Economic Times - 7 ways to figure out problems in a company's financial health
LESSON: So with Domino's here:
1. Doing a google search for why Domino's shares were struggling in 2015 led to that helpful article which explained the accounting trick.
2. And so it sounds like their increasing debt and higher debt levels may indeed be an early warning sign of a rockier road ahead?
The article was a report on somebody else's analysis - but the analyst thinks it's possible Domino's might actually *decrease* next year! So guess maybe it'll be interesting to watch and see what happens to DPZ next year as well?
Last edited by TrustySam; 08-28-2017 at 07:47 PM.