Red Flags in a Company
Every stock is a masterful story that has stakeholders heavily involved in the very real tale; but unlike books we may read in elementary school school, very few have an ending that ends the way we may want it. Unfortunately, it's easier now than ever to get swept up in hype and false promises a company may communicate to the beginner investor. So this week's article is all about the common snake oil used to reel in investors. Let's dive in!
If It's Too Good to Be True... It Probably Is
I can't name a single stock that tries to sway its investors or potential investors into pouring (more) money into a stock... because they all do it. However, this tends to be in subtle advertising that slips into our subconscious and isn't necessarily avoidable. Whether it's Meta stating the obvious of their grip on society and public attention, or Nvidia's promising future being pioneers of AI, all companies want funding. What I am more specifically speaking to when I mention the too good to be true narrative is other news sources that have skin in the game. Whether their pitiful attempts at persuading investors use all of the popular buzzwords, sell a promise such as being "the next Tesla", or any other dirty trick in the book, don't buy it.
Financial Red Flags
If you've read previous articles, you may think I am beating a very dead horse when I talk about financials yet again. But I cannot stress enough how important they are. Straight to the point, the financial red flags you need to watch for on companies include excessive debt, where the company is borrowing faster than revenue is growing; a negative free cash flow, spending more cash than what was generated; potential earnings manipulation, adjusting earnings through non-GAAP (not generally accepted accounting principles). If any of these terms are greek to you feel free to check out prior articles such as where I define fundamental stock statistics, or walk you through an earnings report.
Over-Reliance on a Single Factor
Many small businesses only offer one type of service or product that they have mastered and customers tend to enjoy. While this can create a successful small business, it wouldn't begin to pay the rent on publicly traded companies. The most notable example of publicly traded companies that fall victim to this are biotech or pharmaceutical companies, who often have their whole business dependent upon a product that fails. Inversely, take a successful company like Amazon. While it started as a humble book store for online, it now is the largest online retail store, a giant in the streaming industry, the largest cloud provider, and many more revenue streams that make it the $2.5 Trillion business it is today.
Remember that a red flag doesn't always scream "sell!" for a stock. Every situation is different depending on the company, which us mere mortals will likely never fully be exposed to. So I encourage all readers to do their own research and make the trading decision that you have most confidence in, because I can't promise a stock won't go up while having one or more of these red flags. What I can promise on behalf of Monk Investments is we believe education should come before persuasion. Our goal is to give you clear, unbiased insights that help you make a better independent investor — not to push products, hype up trades, or sell you on the “next big thing.” We’ll never pressure you into acting on tips or chase trends for the sake of clicks. Instead, we’ll focus on equipping you with the tools, frameworks, and perspective to think like a disciplined investor. Because in the long run - lasting confidence in your financial journey matters far more than any short-term trade.
*This article is for informational and educational purposes only. It should not be considered financial, investment, or trading advice, nor a recommendation to buy or sell any securities or financial instruments. Past performance is not indicative of future results. Markets are volatile and unpredictable; no indicator is foolproof.