The Seven Signs You Own a “Toxic Stock”
During interviews on national TV, my appearances at investment symposiums, or even when I’m out with friends, there’s one question that I hear over and over: “What stocks should I buy?”
But almost no one ever thinks to ask: “Which stocks should I sell?”
And that’s the question you should be asking yourself.
You see, if you want to make money – and I mean real money – in stocks, you need to avoid ruinous losses.
And you dodge those deep losses by avoiding “toxic stocks,” the ticking investment time bombs that can detonate your portfolio – and your future.
Yes … toxic stocks will kill you.
But here’s the good news: Toxic stocks are easy to ID. In fact, there are seven signs I look for, and see plain as day, that scream: “That’s a toxic stock … sell it!”
And I mean … now … today.
In this issue of Total Wealth, I’m going to share the “seven signs you own a toxic stock.”
And I’m going to give you some hints about seven companies that are giving off one or more of these signals.
When we meet here next time, I’ll do “The Reveal” – and will share the identity of each of these firms.
Seven “toxic stocks” that you’ll need to dump – immediately.
Danger Zone Signals
Toxic Stock Signal No. 1: The “Go-Nowhere” Venture: These stocks aren’t going anywhere because the underlying company isn’t going anywhere. You know the kind of company I’m talking about: At first glance, the business may seem to make sense – the firm makes or sells something customers would logically want (even if you don’t).
But then you drill down. You look at the numbers. You see that the firm’s revenue and profits are flat, have been flat for years – and aren’t likely to suddenly revive anytime soon. That’s a toxic stock – one you want to sell.
And I promise to give you an example.
That brings me to the next sign.
Toxic Stock Signal No. 2: The Hype Train: From all my years as a professional investor, my personal radar is super-sensitive to hype. You see this when everyone seems to think this or that company is the “next best thing since sliced bread,” and perhaps you even think so, too. The stock has probably enjoyed quite the rocketing run. The downer comes when you look at revenue, and profits, and see that they haven’t zoomed in concert with the shares. That “disconnect” tells you that you’re looking at a toxic stock.
Overly hyped stocks are a trap. One of the most overly hyped stocks – that’s had a good run – is so toxic if you own it, you’re going to take a bath on it. What is it? I’ll tell you what it is and why the hype is wrong.
But before I do, let me tell you what the third sign is.
Toxic Stock Signal No. 3: The Debt Bomb: The third sign you have to look for is so obvious that you can’t miss it.
If a company is straining under a mountain of debt – and that pool of debt keeps getting deeper – that’s a flashing caution light. If that debt keeps growing – with revenue heading in the opposite direction – that’s a toxic stock.
I’m not talking about some companies that use debt like a maestro guides an orchestra – smart and successful companies like Apple Inc. (Nasdaq: AAPL) and Amazon.com Inc. (Nasdaq: AMZN) and Microsoft Corp. (Nasdaq: MSFT) that utilize debt to boost profits and returns for their shareholders.
I’m talking about companies that use debt to mask very real problems – like stagnant firms that have to keep borrowing money to keep paying you that juicy dividend.
I have one such stock in mind – and I’m going to share it with you.
But before I do let me tell you what the fourth sign is.
Toxic Stock Signal No. 4: The Scam Artist: The fourth sign is fraud. Believe it or not, some people buy and hold the shares of firms that have been accused of some type of fraud – or that have ‘fessed up after having been caught dead to rights. I’m talking about fraud in their financials, like hyping up their revenue, or masking debt or using “one-timer” accounting tricks to pump up profits, or to even create some that don’t exist.
You might even own a “hot” stock of a company that people love because it’s in the same business as some of the most successful firms on the planet – making it easier to “buy” the numbers they’re dishing.
But there’s been fraud there and there probably still is. This stock looks good but it’s toxic. Really toxic.
I’ll tell you what the stock is and what fraud they’re guilty of.
But before I do let me tell you what the fifth sign is.
Toxic Stock Signal No. 5: The Also Ran: The fifth sign that your stock is toxic is if the company operates in a scorching-hot sector – where lots of companies are making tons of money – but your company isn’t basking in the heat and, in fact, is getting left behind.
In short, it’s an “also-ran.”
One of the hottest trends going right now is housing. The sector is absolutely on fire, and some of the biggest names in the business are absolutely smoking – companies like Zillow Group Inc. (Nasdaq: Z), and a lot of home builders. But the company I have in mind is going nowhere – despite being in the middle of all this.
This company, which you definitely know, and probably own or are thinking about buying, isn’t going anywhere and its stock is toxic for a few good reasons.
Before I tell you what it is, let me tell you what the sixth sign is.
Toxic Stock Signal No. 6: The Longshot: The sixth sign a stock is toxic is when you think it’s worth a gamble (or “taking a flier” in investment parlance) because other people are gambling on it. If it’s a gamble – a longshot bet – it’s 99% likely to be toxic.
The case in point here is actually a gambling company. Its stock is toxic because it is pure gambling.
That brings us to the final sign – lucky, or unlucky, No. 7.
Toxic Stock Signal No. 7: The Game-Player: On Wall Street, the term is “financial engineering.” But that’s when a company is really playing games – with the shareholders as the likeliest losers.
There’s a reason for financial engineering, and when the reason is about stripping the company of its assets or moving things around to make nothing look like something, that’s a toxic company.
And a toxic stock.
The stock that comes to mind here is probably in your portfolio and may have been for a long time.
It’s time to sell it.
Tomorrow I’ll tell you what the seven toxic stocks I’ve pointed to here are.