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New Feature Announcement: The Warning Signs

August 08, 2012 | About:
GuruFocus

GuruFocus

335 followers
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:

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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.

Rating: 3.0/5 (80 votes)

Comments

Adib Motiwala
Adib Motiwala - 1 year ago
Good stuff

Question. What is the time used for these calculations? Operating margin declined over previous year , recent quarter, 5 year trend?
cdubey
Cdubey premium member - 1 year ago
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.
Adib Motiwala
Adib Motiwala - 1 year ago
I would take the clutter. Its just getting used to the layout. Overall its fantastic in my opinion.
newhigh
Newhigh premium member - 1 year ago
Full marks again to Charlie Tien and the GF team. Keep up the great work.
fai
Fai premium member - 1 year ago


I like a lot your new fautures!!!
dr.robin.sharma
Dr.robin.sharma - 1 year ago
teichman82
Teichman82 premium member - 1 year ago
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?
gurufocus
Gurufocus premium member - 1 year ago
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.
Cogitator99
Cogitator99 - 1 year ago
Great job
amcfutures
Amcfutures - 1 year ago
What is the difference between a moderate warning and a severe warning? In other words, at what point is a moderate warning upgraded to a severe warning?

bvigorda
Bvigorda - 1 year ago
How do we access this on a regular basis - or do we just click on the email link whenever we get one for updates?
gurufocus
Gurufocus premium member - 1 year ago
hi Bvigorda,

type in any stock symbol in the search area to see the warning signs.

Warning signs will also be integrated in All-In-One Screener.
bvigorda
Bvigorda - 1 year ago
Thank you
cedrool
Cedrool - 1 year ago
Very concise and useful....Would you consider change in free cash flow as well?...Cedrool.
gurufocus
Gurufocus premium member - 1 year ago
no. Change in free cash flow can be quite dependent on management's decisions on capital spending.

newhigh
Newhigh premium member - 1 year ago


Warning signs are a helpful tool. But I cannot seem to get them to work on the All-in-One Screener. For example when I try to screen for stocks with 2-9 good signs AND 0-0 warning signs, I get zero results. Changing the numbers yields no job.

Can someone try to de-bug this?

Please leave your comment:


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