Investing Professor
by on February 28, 2022  in Investing /
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Every investor is occasionally caught off-guard by a stock that rapidly falls in price. While it’s not always possible to predict a stock price tumble, there are several warning signs that can help the alert investor. Stock investing requires regular attention. It’s imperative to constantly reevaluate your investments, particularly when the fundamentals or overall market changes.

 

By watching for the warning signs, you’ll be in a position to sell before it’s too late. A couple of minutes each week can make the difference.

 

Reevaluate your investments when these warning signs are present:

 

  1. Earnings are falling for the company or entire industry. History has shown that stock prices ultimately rise or fall with earnings. If a company’s earnings are falling, the stock will eventually fall, too. It’s also time to think about moving on when the entire industry is falling off. Examining your company’s earnings per share is one place to start.
     
  2. Company insiders are selling. Executives are expected to show loyalty to their company, but it’s all about the money. When a company’s executives are selling large amounts of stock, pay attention! They aren’t interested in losing money any more than you are. Keep an eye on the buying and selling activities of the executives.
     
  3. The company is rapidly spending its cash reserves. When revenues are down, companies start rapidly burning through cash. Take a look at the company’s balance sheet under the line item “Cash & Equivalents.” A sharp, downward trend is reason for caution. The company could be spending that money to stay afloat.
     
  4. The company releases a product that doesn’t fit. A company will often release an oddball product when the future looks bleak. Does a product make sense? Or is the company launching a Hail Mary and praying to be saved?

 

    • There are many examples of this. Have you ever tasted Jeff Gordon’s collection of wines or tried Burger King’s perfume? Probably not, but they did exist.
       
  1. The company makes one or more acquisitions that don’t fit. If a company has done nothing but make tires for the last 40 years, you have the right to be concerned if it suddenly acquires 23 radio stations. Few companies have the resources and knowledge to effectively manage disparate businesses. Many have tried, and few have succeeded.
     
  2. Dividends are being reduced. Companies and industries that routinely pay dividends can be judged by the trends in the dividend.

 

  • The cutting of dividends can be a telltale sign that challenging times are ahead. But be careful. Dividends can be cut because funds are needed for expansion. A dividend cut isn’t always a reflection of decreased revenue or profitability.
     
  1. There’s a systemic problem within the company or the industry. Has technology changed in a way that negatively impacts the overall industry? The conventional travel agent industry would be one example. Has the company been hit with several major lawsuits that could cause significant damage?
     
  2. The economy is tanking, and the company’s industry is sensitive. Consumers are less likely to buy expensive watches and recreational vehicles during challenging economic times. Pay attention to the big picture and the economic environment. How is the company likely to be impacted by particular economic conditions?
     

The price of a stock rarely falls rapidly without warning. The signs are there if you know where to look. Effectively evaluating the warning signs can prevent a catastrophic loss in the stock market.

 

Spend a few minutes each week examining your stocks, and the market, for any signs that the price could take a significant tumble. You’ll be glad you did!

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Investing Professor
Investing Professor is the WealthCare Connect virtual instructor that provides members with educational investing content. All content is for general informational purposes only and does not constitute investing advice. Consult with a licensed investment professional before making any investment decisions.
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