5 Red Flags Signal a Troubled Stock

Five "Death Spiral" Indicators to Identify If a Stock Could Crash and Burn
A Taipan Publishing Group Strategy Report
by Zachary Scheidt, Editor, Death Cross Trader

When trolling for stocks likely to crash and burn, there are five “red flags” - what I call the Death Spiral indicators - that I look for. Now not every excellent short has each one of these characteristics, but as a stock begins to emulate three, four, or even all five of these characteristics, my radar kicks into high gear and I pull up my chair for a front row seat! Honestly, I don’t like to see any stock self-destruct. But if it’s going to happen, we might as well profit from it.

The first flag on my list of my "Death Spiral" indicators is...

• Red Flag 1: High Valuation
  
  Individual companies typically report quarterly and annual "Earnings Per Share" or EPS. Stocks are valued based on a multiple of these earnings. That multiple depends on many things including the expected growth of future earnings, current interest rates, and the risks present in the market.
  
  When investors throw caution to the wind, and are willing to buy at any price, it drives stocks too high. An objective way of measuring this enthusiasm is by taking the stock price and dividing it by earnings per share. A high number is a hint that this could be a Death Spiral candidate.

• Red Flag 2: Rapid Advances
  
  I always sit up and pay attention whenever anyone tells me they made 100% on a stock purchase. Now to be fair, I’ve hit plenty of home runs myself, and there’s nothing more exciting than doubling or tripling your investment in a short period. But when a stock shoots for the moon, it's time to look carefully at what is driving that increase.
  
  Unfortunately, rapidly advancing stocks draw the wrong kind of investor. Adrenaline junkies who really belong in Vegas are always on the hunt for the next hit. When these guys start piling in on a name, it drives the stock higher, but also makes the stock unstable. You can bet that when the music stops, they will bail faster than a loser at a craps table, sending the stock lower. So a rapidly advancing stock price is another indicator of a Death Spiral candidate.

• Red Flag 3: Loyal Investor Base
  
  Occasionally, I will mention to a group of investors that I have concern over a stock's price or a company’s prospects. There are times when you would think I had just insulted the Pope! A dirge of nasty emails, or a tongue lashing on an investment chat board lets me know that I’ve hit a raw nerve.
  
  When investors have so much loyalty that they can’t even participate in an educated discussion about a stock’s merit, valuation, or business model, you’ve got a problem. Typically at this point, the stock is being bought without any regard to price... indicating a potential Death Spiral candidate.

• Red Flag 4: Fad Product or Service
  
  We’ve all seen them... Shoes with wheels or Swiss cheese holes. An online store for digital pets, or a manufacturer of specialty cookware. While these stories make for exciting conversations around the water cooler (and actually make for some fantastic trading gains in the short run), they usually always run too high, and then come crashing back to earth.
  
  A few new ideas actually work for a business. But many take a lot of time to reach critical mass. When investors see that the progress is slower than expected, they begin allocating less capital to the story. It’s not true every time, but it’s a good bet that at some point in its lifetime, a fad stock will lose 50 to 80% of its value. Recognizing an unsustainable fad situation is a great way of uncovering a Death Spiral candidate.

• Red Flag 5: Emerging Competition
  
  Nothing draws attention like fat profit margins. It’s a basic tenant of economics and a pillar of our capitalistic society. "If you can do something well, I can do it better!" This is part of our competitive society and actually works to the consumer’s benefit as producers compete for your spending dollars.
  
  But competition is one of the main forces that causes companies to go under. Just because a new start up enjoys 70% margins (making $7 dollars in profit for every $10 dollars of sales) doesn't mean it will last. If a new business steps in and sells a similar product for less money, those margins evaporate and profit becomes a thing of the past. So news of a new competitor is an excellent indicator of a Death Spiral candidate.

I hope these five "red flags" are helpful as you sift through the current fluctuating markets for your next investment. We're constantly uncovering new Death Spiral candidates in our research for Death Cross Trader and using these indicators to separate the winners from the losers. And that's helped our readers see phenomenal gains. Let me show you what I mean...

Even though the Dow has plunged 30%, I've introduced my Death Cross Trader readers (and I can show you too!) to a cutting-edge trading formula that has shown them 170 winning picks (and we're just getting started), with single-pick gains of 279%... 291%... 224%... 214%... just to name a few. Now it's your turn to earn triple-digit gains like these.

Learn how you could turn the market crisis into your personal profit machine. Oh, and before I forget, you can also get 42 free picks too!

Get all the details in this exclusive report.

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