We normally talk about the characteristics we love to find in stocks. But this week, we bring you all the things we hate. We’ve all gotten caught in a hype cycle or seen an investment thesis degrade, so having a list of red flags to look for is a great way to check in with your portfolio.
They include:
Over-promising. It can be hard to spot fraud in the early days, but if a company is hyperbolic in its language, give it some time. Pre-revenue companies are especially prone to talking big, and they’re a hard pass for Mike.
Management woes. Referencing Good to Great by Jim Collins, Emmet reminds us a great CEO is someone with fierce resolve and a degree of humility. The inverse can be very damaging and often looks like prioritizing short-term gains and selling significant stock during all-time highs. A revolving door of CEOs is also a huge red flag.
Creative accounting. If you see a big difference between net profit and cash flows, or an overuse of adjusted EBITDA, you might want to think twice. These can indicate profits are tied up in unpaid bills or outsized stock-based compensation, which dilutes investors over time.
Deteriorating fundamentals. Slowing revenue growth, compressed margins, bland return on equity (ROE), or rising customer acquisition costs can all signal a business entering decline. However, if you think you’ve spotted a potential turnaround play, these may also be present.
Unforeseen circumstances. Significant, world-changing disruption is also hard to predict, which is why diversification is key. SaaS businesses being upended by AI is a good example.
Valuation. You can buy great businesses, but at extreme prices they can be bad investments. Don’t completely avoid stocks at 25x earnings, as a company can keep delivering, but stay within the realms of reality.
Customer concentration. Reliance on a single client can be a huge risk. It’s particularly prevalent among small businesses that serve enterprises. Progyny (PGNY) vs Amazon (AMZN) is a good case study.
High dividend yield. Yields of 8–10% are often too high. If the payout ratio is above 100%, the company may be borrowing money to pay investors. That won’t last long.
Binary outcomes. For example, pharmaceutical companies waiting for regulatory approval. If they fail, the business can collapse.
After all that, Emmet brings us Follow Prophet, talking about its recent addition, SPX Technologies (SPXC).
Finally, we celebrate Ireland’s new investing accounts. Simon Harris has announced that we will follow the Swedish model, with a launch expected in 2027. We’ll break down the full announcement next week.
Our Horizon portfolio is a boutique service led by our co-founder and lead investor, Emmet Savage. According to 100-bagger expert Chris Mayer, “no one owns more 100-baggers than Emmet”.
This week, he’s adding a new stock that has passed 3 AI screeners and got a shout out from Porter Stansbury. Lucky for Stock Club listeners, they can claim as exclusive offer by emailing: frank@mywallst.com.
Psssst…. We don’t think you’ll want to miss this year’s Investicon. Grab your early bird tickets now: https://www.investicon.ie/
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(adjust these after intro)
00:00 Intro04:31 Shorting Stocks Talk10:35 Founder CEOs vs Insider Selling17:35 Creative Accounting22:35 Deteriorating Fundamentals30:59 Valuation Reality Check32:27 Customer Concentration34:20 High Dividend Yield37:25 Following Prophet43:24 Ireland’s New Investment Scheme
