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New Feature Announcement: The Warning Signs
Posted by: GuruFocus (IP Logged)
Date: August 8, 2012 10:18AM

GuruFocus has just released a feature called Warning Signs. We conducted a thorough checkup using a checklist of 32 items that cover the areas of financial strength, profitability, growth and valuation of each company. We highlight the warning signs in the summary box. An example with First Solar (FSLR) is below:



The purpose of Warning Signs is to warn you that the company may have red flags in certain areas, helping to avoid overlooking them. These warning signs do not necessarily mean you should not invest in the stock. But you should be aware of them before you invest.

If you click on the Warning Signs button, you will be brought to the “analysis” page where the details are displayed. In the case of First Solar, the Severe Warning Signs are:

Warning Signs with First Solar (FSLR):

Financial Strength: Poor

First Solar Inc. displays poor financial strength. Usually this is caused by too much debt for the company.

Altman Z-Score: Distress

Altman Z-score of 1.09 is in distress zone. This implies bankruptcy possibility in the next two years.

Piotroski F-Score: Low

A Piotroski F-Score of 1 is low, which usually implies poor business operation.

Interest Coverage: Extremely low

Ben Graham prefers companies' interest coverage be at least 5. First Solar Inc.'s earnings cannot cover its interest expense. If the situation continues, the company may have to issue more debt.

Long-Term Debt: Keeps issuing new debt

First Solar Inc. keeps issuing new debt. Over the past three years, it issued $620.41 million of debt.

Asset Growth: faster than revenue growth

If a company builds assets at 28% a year, faster than its revenue growth rate of 6.8% over the past three years, it means that the company may be getting less efficient.

Days Sales Outstanding: Building up

If a company's sales outstanding increases, it means it has difficulty collecting payment from its customers.

Days Inventory: Building up

If a company builds up inventory, it may mean it is having difficulties selling its goods.

And the two medium Warning Signs are:

Per Share Revenue: Growth slow down

First Solar Inc. revenue growth has slowed down over the past 12 months.

Operating Income: loss

First Solar Inc. had operating losses over the past three years.

With all these warning signs, it is no wonder that legendary short-seller Jim Chanos shorted the stock. The stock lost more than 90% over the past three years, and Jim Chanos made a fortune out of it.

The warning signs have usually long been there with these companies. The companies with a large number of warning signs at high valuations are usually good short candidates. We will discuss this more in the next article.

Paying attention to Warning Signs will help investors avoid value traps. As we discussed in A Simple Way to Spot Value Traps, we pointed out that profit margin decline is usually a warning sign of a value trap. We used Nokia (NOK) as an example. The stock has lost more than 90% in the past five years.

Warning Signs with Nokia (NOK)

Altman Z-Score: Distress

Altman Z-score of 1.34 is in distress zone. This implies bankruptcy possibility in the next two years.

Piotroski F-Score: Low

A Piotroski F-Score of 2 is low, which usually implies poor business operation.

Interest Coverage: Extremely low

Ben Graham prefers companies' interest coverage be at least 5. Nokia Corporation (ADR)'s earnings cannot cover its interest expense. If the situation continues, the company may have to issue more debt.

Per Share Revenue: Declined

Nokia Corporation (adr) revenue has been in decline over the past three years.

Gross margin: Declined

Nokia Corporation (adr) gross margin has been in long-term decline. The average rate of decline per year is -2.6%.

Operating margin: Declined

Nokia Corporation (adr) operating margin has been in long-term decline. The average rate of decline per year is -30.7%.

Long-Term Debt: Keep issuing new debt

Nokia Corporation (adr) keeps issuing new debt. Over the past 3 years, it issued $235.32 million of debt.

Many of these Warning Signs have been there for many years. If investors were aware of these Warning Signs, they would have avoided the large losses. Similarly with:

RadioShack (RSH):

Gross margin: Declined

RadioShack Corporation's gross margin has been in long-term decline. The average rate of decline per year is -2.2%.

Operating margin: Declined

RadioShack Corporation operating margin has been in long-term decline. The average rate of decline per year is -2.8%.

Again, you need to be aware of the Warning Signs of companies. Doing this can help you to find out what you may have overlooked and avoid large losses. Sophisticated investors may use Warning Signs to screen good short candidates.

Warning Signs is a feature for GuruFocus Premium Members. If you are not a Premium Member, we invite you for a 7-day Free Trial.


Stocks Discussed: FSLR, NOK, RSH,
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Rating: 3.0/5 (80 votes)



Re New Feature Announcement The Warning Signs
Posted by: Adib Motiwala (IP Logged)
Date: August 8, 2012 12:42PM

Good stuff

Question. What is the time used for these calculations? Operating margin declined over previous year , recent quarter, 5 year trend?


Stocks Discussed: FSLR, NOK, RSH,
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Rating: 2.0/5 (1 vote)



Re New Feature Announcement The Warning Signs
Posted by: cdubey (IP Logged)
Date: August 8, 2012 05:25PM

Very useful ! You guys are improving the stock pages by leaps and bounds. My only gripe is that the pages are becoming more and more cluttered.


Stocks Discussed: FSLR, NOK, RSH,
Rate this post:

Rating: 4.0/5 (1 vote)



Re New Feature Announcement The Warning Signs
Posted by: Adib Motiwala (IP Logged)
Date: August 9, 2012 12:28AM

I would take the clutter. Its just getting used to the layout. Overall its fantastic in my opinion.


Stocks Discussed: FSLR, NOK, RSH,
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Rating: 0.0/5 (0 votes)



Re New Feature Announcement The Warning Signs
Posted by: newhigh (IP Logged)
Date: August 9, 2012 02:12AM

Full marks again to Charlie Tien and the GF team. Keep up the great work.


Stocks Discussed: FSLR, NOK, RSH,
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Re New Feature Announcement The Warning Signs
Posted by: fai (IP Logged)
Date: August 9, 2012 03:18AM


I like a lot your new fautures!!!


Stocks Discussed: FSLR, NOK, RSH,
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Re New Feature Announcement The Warning Signs
Posted by: dr.robin.sharma (IP Logged)
Date: August 9, 2012 05:19AM



Stocks Discussed: FSLR, NOK, RSH,
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Re New Feature Announcement The Warning Signs
Posted by: teichman82 (IP Logged)
Date: August 10, 2012 01:11PM

Hmm. Maybe I'm just not seeing it on the page, but is there a place that describes all 32 warning signs and how GuruFocus calculates them?


Stocks Discussed: FSLR, NOK, RSH,
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Re New Feature Announcement The Warning Signs
Posted by: gurufocus (IP Logged)
Date: August 10, 2012 01:45PM

The warning signs are actually the results from a checklist. The list is not published. But if you think there are areas that we should cover, please let us know in the comment area.


Stocks Discussed: FSLR, NOK, RSH,
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Re New Feature Announcement The Warning Signs
Posted by: Cogitator99 (IP Logged)
Date: August 13, 2012 01:07PM

Great job


Stocks Discussed: FSLR, NOK, RSH,
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