May 2018

Choose Safety First – Learn How To Identify Risky Stocks

By Ray Mullaney
Originally published in Senior Digest

This is the first of a series of five articles to help you understand and avoid risky stocks and the losses which often follow. Please print this out and put it in a notebook, along with the four following articles, and you will have a thorough and highly useful primer to help you identify, understand and avoid risky stocks.

A company’s Solvency should be the first test you perform on any company before you buy it.

Prudent investors, like yourself, should only buy a company if it has “the ability to pay-off its all their debts, from liquid assets and easily liquidated assets”. That’s a high standard of solvency. Such companies literally can’t go bankrupt.

But most investors settle for and buy companies with much higher financial risks. They ask, “can this company, presently, manage their debts”. That’s a far cry from a company that can easily “pay-off all their debt”.

Moreover, most investors look to a company’s “earnings” to assess how well they expect a company can “manage” their debt. That’s a risky proposition. How many public companies, in the past 20 years, had great sales and earnings, then faced such declines in sales and earnings that they went bankrupt? What’s the chance of that happening to the company you own? Can your current “advisor” honestly tell you he or she has the expertise to answer these two critical questions?

Let me illustrate: When you’re starting off in life you buy a house. You pay your mortgage from your earnings. But then, if you prosper down the road, you build up savings (equity) apart from your house and your savings (your total liquid equity) becomes far greater than your mortgage. Now you’re solvent! But when you started out, you managed your debt. Now, your liquid assets can be used to pay off all your debt. Now you have a safe financial structure. Buy companies with little financial risk and that’s one less thing that can hurt their price.

But if you just look to a company’s earnings to manage their debt, if their earnings fall, how long will it be before they no longer manage their debt, and their debt begins to manage them?

A company whose debts are far greater than their liquid assets is out on a limb. It doesn’t mean that limb will break. But how do you know it will not? Why take the chance? Your “advisor” will say they’ll be fine! But neither you nor your salesperson knows for sure.

We purchase risk analysis research from Equity Performance Sciences. This company does not make stock “buy or sell recommendations”; they focus exclusively on risk research.

How much of your savings can you afford to lose? Whatever the amount, the rest of your savings are funds you can’t afford to lose. For that part of your savings, protecting is more important than growing, right?

With that portion of your savings would you say that you simply cannot afford to lose? For your “safe money bucket” it is wise and prudent to avoid investing in companies with debt levels that cannot be paid from current liquid assets. There’s one more crucial consideration; if you pay too much for such companies, you may still lose a fair percentage of your investment.

Capital Preservation Trust, LLC is a Rhode Island Registered Investment Advisory firm focused exclusively on protecting capital. We will be happy to show you how we use our advanced proprietary technology to protect your capital.

Here’s a short list of bankrupt companies that you may know… but there are over 9,000 more!

Aeropostale, Inc.

Agway Inc.

Ambac Financial

Ames Stores

Bally Fitness

Bethlehem Steel

Blockbuster

Borden Chemicals

Boston Chicken

Bradlees

Caesars Entert.

Carter Hawley

Charter Comm

Charter Medical

Chesapeake Corp.

Chiquita Brands

Circle K

Circuit City

Color Tile

Columbia Gas

Conseco

Days Inns

Delphi Corp

Delta Air

Dow Corning

Eastman Kodak

Eddie Bauer

Emerson Radio

Enron

eToys

Federal-Mogul

Federated

First Capital

First Executive

Florida Coast Paper

Formica Corp.

Frontier Airlines

Fruit of the Loom

G. Heileman

General Growth

General Motors

Global Crossing

Great Atlantic & Pacific Tea

Greyhound Lines

Guaranty Financial

Hartmarx

Harvard Industries

Hawaiian Telcom

Hawker Beechcraft

Heartland Wireless

Hechinger Company

High Voltage

House of Fabrics

Imperial Capital Bancorp

Imperial Sugar

IndyMac Bancorp

Integrated Resources

Integrity Bancshares

Intermark

Interstate Bakeries

Kaiser Aluminum

Kimball Hill, Inc.

Kinder Care Learning

Kitty Hawk

Kmart

Koger Properties

Koll Real Estate

Lear Corp

Lehman Brothers

Levitz Furniture

Linn Energy

Loral Space

Lyondell Chemical

Marvel Entertainment

Mayflower Group

Memorex Telex

Metromedia Fiber

MicroAge

Midway Airlines

Mirant

Monarch Capital

Montgomery Ward

Morrison Knudsen

Movie Gallery

National Gypsum

National Steel

NetBank

New Century Financial

Nortel Networks

Northwest Airlines

NTL Comm.

Orion Pictures

Outboard Marine

Owens Corning

Pan Am

Payless Cashways

Peabody Energy

Pilgrims Pride Corporation

Pioneer

Polaroid Corp

R.H. Donnelley

RadioShack

RCN Corp

Real Mex Rest

Refco Finance

Reliance Group

Safelite Glass

Safety Kleen

Sbarro

Sea Containers

Service Merchandise

Sharper Image

Simmons

Singer

Six Flags

Smurfit-Stone

Southland

Southmark

Standard Brands

Stone & Webster

Sunbeam

Syms

Thornburg Mortgage

Tower Automotive

Trans World Air

Tribune

Tweeter Home

U.S. Home

U.S. Office

UAL

United Artists

US Airways

USG Corp

Vlasic Foods

W.R. Grace

Wang Labs

Warnaco

Washington Mutual

Waste Systems

WCI

Williams Comm.

Winn-Dixie

Wireless One

Worldcom

XO Comm.

Zale Corp.

Zenith

This list contains companies from every business sector in America. But you won’t find one company on this list whose liquid assets were greater than their total debts. 42 years in the business: lesson learned.