-Kathryn Staley decided to reverse the way stocks of companies are looked at by looking at the difficult and dangerous endeavor of short selling, or selling shares that you do not own. The idea is to make a profit with the drop of the stock price by borrowing shares that you do not own. Even if short selling is never engaged in, understanding the analysis could aid on the long-term buy and hold side.

-bad signs; inventory growing faster than sales, management makes more than shareholders, too much brutal competition

-short selling is also a form of hedging

-analysts and people get restricted from short selling as they get fired or blocked. This leads to reduced analysis and information stupidity. Our generation is getting stupider by the day.

-brokerages need to have a positive bias otherwise they won’t get money and commissions

#1: Short: fraud, overvalued, fads, significant headwinds coming

-avoid management teams with no integrity.

-stock holders are too slow to sell bad companies, short sellers too early in

-only short if preferably the company is overvalued and a fraud and not too early, wait for smoke. Way too risky otherwise

-short sellers keep ideas secret to prevent buying.

-good ideas stay close to the originator

-a good stock to buy, of fundamentals play out correctly, is high short interest volume, or short volume that has reached its maximum, with the stock price beyond depressed. This leads to further opportunity for price gain, provided the short positions was not done as a hedge but based on battering an overvalued company as opposed to a fraudulent company

-for the trainer eye, one can always identify muddled corporate strategic plans

-short companies: management owns little stock, management not realistic about business, company itself is in a state of mess financially, frauds

-need a catalyst and momentum

-avoid companies in a disastrous financial position, that have a balance sheet

-look at a companies gross and operating margins. If they are declining significantly, that is not a good sign

-Wall Street analysts are poor judges of good investments, else they would be retired by now

-investment bankers have the same value to society as drug dealers

-avoid overly leveraged companies, such as banks

-Return On Invested Capital is by far the most important metric

-selling good assets to buy cashflow negative real estate is not smart at all

-the majority is always wrong

-sometimes underwriters can get up to 20% in fees of new offering of stock capital. That’s a lot!

-Beware of sudden changes to financial statement line entries such as accounts receivable, with no justifiable reason

-the first few pages on an IPO prospectus are key for discovering disasters. Putting photos of kidneys is not smart.

-The most important section is called investment considerations

-if shorting fads, do so near the end of the fad. Like 3-D printing in 2013

-rapid insider selling is not a good sign

-buy fads early and sell at the top

-high valuation, high prices stocks offer low upside, high downside

-fads and overpriced stocks can last a long time

-if only raw inventory goes up, the company may have production problems

-if AR up way more than revenue or cost of sales, may be in trouble too. Or revenue down despite intangible assets and other assets up, like inventory. Beware bad financial statement companies

-Operating cash flow needs good receivable collection and inventory turnover

-if poor earnings from footnotes or other income, a bad sign

-in store person spot checks actually work to see if the new store is good. Many companies lie or don’t report bad news for new store, and simply disregard it

-if a company wants to slow down growth, that can often be a bad sign. Doesn’t make any sense analysts think slowing growth down is a good sign

-for expansion, need good pricing and margins. Otherwise, contraction occurs

-watch for potential signs of failure, such as failed expansion or financial metric misses.

-watch out for sudden infusions of cash

-Jiffy Lube over expanded at a fast pace and had too much debt

-watch out for lots of one-time items, particularly that are massive

-when Wall Street pumps a stock, buying then is buying closer to the top

-in the IPO prospectus, or 10k or 10q, jiffy tube mentions next few years of capital-intensive projects, and declining non recurring earnings. Yet no one reads it and buys in blindly. Direct loans from management itself (always a bad sign. Conflict of interest). This was the first five pages, indicating a clear shorting opportunity.

-the stock market is driven by fools and euphoria

-overly aggressive expansion. Same store sales hurt. Buybacks and dividends when company is losing money – terrible management

-easy access to buy franchises, no money down or checks. Terrible management by jiffy lube. Supposed to be picky with franchisers.

-a company should be leasing its own headquarters, not expanding its owned headquarters. That’s a sign of top of the cycle money. Money spent to buybacks and perks that don’t help the business.

-Jiffy Lube trying to sell 70 locations, bad sign as they are unprofitable

-if a company has to write off receivables, bad sign

-franchises rely on expansion to succeed; they are often in high competition, low entrance barriers. The company makes money, not the franchise buyers

-pure spec growth companies, know when to buy them early but then also sell them at a good time.

-rule: do not have more than two same last names in executive team

-Cott corporation, trying to challenge Pepsi and coke, with way too much inventory increase, receivables. No moat or pricing power, declining margins, aggressive Accounting

-if operating cash flows start declining significantly, with increased receivables, may be a problem of a declining business or a cash collection problem. Particularly important for one product companies

-if insiders suddenly do a secondary offering with an immense number of shares, it implies the stock is likely overpriced

-avoid companies with products that are commodity products with no pricing power

-sustainable growth rate: ROE (x) retention rate. Growth companies with low ROE must keep going to market for money

-discounting at the end of the quarter to boost sales is a bad sign of Accountants cooking the books

-10k describe business of company and financials to back it. If don’t understand, don’t invest

-beware increased revenue with no increase in AR, or vice versa

-or a richly paid CEO or executive team with questionable success

-if you own it and cannot understand it, sell it

-watch out for companies with too many securities sitting on a balance sheet not properly valued. Read footnotes in 10k and financial statements

-mark down inventory or marketable securities, especially ones that aren’t publicly traded

-insurance company financials are too difficult to read

-if a company cannot raise capital from equity or banks with negative cash flow, then they are finished

-if you’re in a company priced on future earnings or cashflow that may not happen, that may be a problem

-being taken over is generally not a good sign as it meant your company had already gone down the drain and now gambling on a one-time gain that may or may not happen

-stocks can remain irrational for long periods of time, several years in fact

-a company that is selling assets, particularly fixed assets, that is typically not a good sign as they should be expanding, not contracting

-decreasing margins is not a good sign

-find companies with good balance sheets

-disguising earnings through acquisitions. What really matters is core operating earnings, forget other income

-declining same store revenue

-Wall Street is quicker to hype a new fad than discard an old one

-watch out for: a dropping local housing market can take out the entire local economy

-more than two of the same last name or family members is a problem

-the red flags for a fraud company are there at the beginning and the smoke slowly turns to fire. If problems show up early, such as increased delinquency rates, get out early

-As banks only have 5 percent equity as most borrowed, they can make a lot but also lose a lot

-how can you not short a retail electronics company that operates a medical school, with family all over the company’s positions?

-analysts do not react enough and don’t downgrade first or adjust earnings, they do it after the fact

-sleaze is sleaze and does not change

-investing mistakes; not doing due diligence, pride

-do not bet against good companies

-do not assume the next company is the same as the current one

-commodities add another inherent risk with commodity pricing

-technology companies are hard to understand

-the times may change, but people and human nature don’t. Bubbles will always exist. People always blame others when things go wrong rather than themselves, so they blame short sellers for their own incompetence. Asset prices move because of fundamentals, not short selling. Governments have tried to ban short selling, only to repeal it. You cannot ban human nature.

-the best way is to regulate rather than prohibit

-no law can protect a person from their own errors

-short sell is not allowed on a down tick, only up, to prevent short selling induced collapses

-like US short selling history, society is trending towards legalizing everything and more government regulations on new legalizations

-One thing people on Wall Street do not have is actual experience; in the use of the product or overseeing of the stores themselves. None of the street experience

-P/S, P/E, P/B, P/FCF. Sudden run ups may indicate overvaluation

-the people who can analyze the cashflow, income and balance sheet will have great success.

-Another troubling sign; constant auditor turnover

-Form 144; insider disclosed trades. Occasionally reported by Barron’s, Wall Street journal

-Form 4, but these are delayed by too much. 10 days after last month of trades

-too many partnerships and transactions and odd loans out are not a good sign

-if you have to read a proxy too many times, you have hit pay dirt. That is not a good sign

-check company against competitor’s numbers and gauge of the overall industry and who is winning in it

-actual experience check; go to location and actually see if the headcount backs what’s reported or if can similar to the financial statements reports

-follow short sale numbers to see for short squeezes. Additionally high institutional ownership is more likely for price collapse as they have concentrated heavy volume all at once

-the later earnings releases are, typically the worse they are. If they were that good, they would want to reveal them right away

-analysts look at company PR rather than the actual financials or fundamentals

Disclaimer

This is not Financial Advice. This article is meant only for educational and perhaps entertainment purposes.