And the next installment of even more signs you should double check the investment thesis of your stock investment:
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Companies with stock symbols that spell out a funny or clever word. "There’s a fine line between clever and stupid" and most of the four letter stock symbols that spell a word cross that line. A stock symbol that spells out a word is usually related to a "gimmicky" company which sports any one or all of the following – 1) a high valuation 2) a high but unsustainable growth rate 3) a promotional management team and/or 4) a high number of inexperienced investors. For instance, symbol "WOOF" belongs to VCA Antech, a veterinary clinic company. It’s a very clever symbol and the stock has done very well despite negative same store sales in its clinics for the past two years. The stock could continue to do well but I won’t touch it because of the symbol – I think it shows a lack of good judgement on the part of management and/or their advisors. Other violators currently include "TINY", which belongs to nanotech investment company Harris & Harris, "RAIL" from FreightCar America, "CARS" from Capital Automotive REIT and "SWIM" from pool maker Anthony & Sylvan.
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The stock is cheap but has no catalyst. If you catch yourself saying “I don’t see a catalyst to get the stock higher but it’s so cheap, there’s little downside,” then sell the stock. Markets are made to find equilibrium of buyers and sellers. If there aren’t any buyers at current levels because there’s no catalyst then the stock will go down to find a price where there are buyers. Another problem with buying stocks with no catalyst is that you never know if to sell – the stock could go down and just get cheaper and cheaper. Then what do you do – do you buy at book value, 1/2 of book value, 1/4 of book value? Buying stocks where there’s a potential catalyst (new CEO, new strategy, new products) gives you a defined decision point – if the company doesn’t execute as you expected then you know to sell.
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Every analyst on the Street has a buy recommendation on the stock except for one or two independent research firms. This is more of a 1990s rule before Elliott Spitzer put the clamp on Wall Street research but it still works in some cases. Most recently it worked with Pfizer (PFE) which had almost all Buys or Strong buys in 2004. You can almost guarantee that stocks with ten buy ratings and no holds are fully valued – that won’t preclude them from going higher but generally, the risks far outweigh the rewards in these circumstances. Likewise, it’s easy to dismiss contrary opinions from no-name research houses when you have Goldman Sachs and Merrill Lynch supporting your position. However, having too many bulge bracket research houses pushing a stock is cold comfort to me. It means everyone knows the story and has probably already invested.
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The senior executives are under the age of 30. If a CEO is under 30, he or she probably started the business in their early 20s. That usually doesn’t give someone enough experience to see the pitfalls and traps most fast growth businesses fall into. I don’t want to be invested when they invariably step into one of the traps. In general, America loves youth. But in business, there’s no replacement for honesty and experience.