Signs of Trouble

We spend a lot of time learning to identify great investments, but what about the stinkers? This review of red flags can help you spot, and steer clear of, bad investments. • A very low price: If a stock is priced below about $5 per share, it’s generally a penny stock, known for volatility and often easily manipulated by scammers. A solid company with a stock price that low is likely to be experiencing a rough patch. • Over-the-top promotion: If you’re seeing lots of capital letters and exclamation marks and you’re being urged to act quickly, beware. Bad investments are often pitched with language such as “amazing breakthrough, “miracle cures” and “HUGE profits!” • Strangely specific claims about future returns: Examples include a “potential 3,227 percent gain” or an expected deal that “will soon push the stock above $20!” A newsletter might claim that its recommendation should rise “more than 40 percent in 30 days.” • An unprofessional company website: Expect and demand clear, honest communication from companies you invest in. Their websites should include their audited financial statements, too. If a company’s website features poor grammar and misspellings and pages that are “under construction” or absent, that’s a red flag. If these companies being promoted were really such terrific opportunities, their shares would be greedily snapped up by savvy investors instead of being hawked to whoever will buy them. These so-called bargains that sound too good to be true are generally bad news. Remember, too, that a low share price doesn’t mean a stock is a good value. A 50-cent stock can soon become a 5-cent one (and often does), while a $200 stock can grow to $400 — and keep growing. When researching possible investments, seek companies with growing sales and earnings, little debt, ample cash and sustainable competitive advantages. Don’t just fall for an exciting story. Demand proven profits, not just possibilities.