Greenberg's Rules for Recognizing Risk

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There is no easy way to spot financial trouble before it occurs, but there are telltale signs that the risk of a rout is higher than a company's stock price might suggest. And you don't necessarily have to be a number cruncher to get that sinking feeling that something isn't quite right.

To help investors navigate this tricky course, I'm revisiting the red flags or warning rules I've presented on RealMoney.com and in Fortune. I like to call them Greenberg's Rules for Recognizing Risk:

One of my favorites, the veering from the herd rule, is when a lone brokerage analyst breaks from the crowd and downgrades a popular stock to "sell" or "hold." These defectors are often early, but they usually have a good reason. You can find out who they are through institutional services like Baseline or Bloomberg (if you have access to them) or through the "upgrades and downgrades" section under company profiles on Yahoo! Finance. You can actually get many of the reports (for a fee) from First Call (www.firstcall.com) or Multex (www.multex.com). Many others, however, are available free from the brokerage firms or from online brokers that offer reports from various firms. (Don't try calling the analysts, however; they won't take your call.)

And if you send away to a company for information, you'll love the tape-measure rule: The thicker the investor package provided by the company, the less legitimate the company. Examples: Exxon Mobile (XOM Quote - Cramer on XOM - Stock Picks) has a thin package. By contrast, every little oil and gas company that blew up after the oil collapse in 1980 had fat investor kits, with a bazillion press releases about wells and drilling prospects that never materialized.

Then there's the CFO-revolving-door rule: It's really not a good sign when a company is churning through a chief financial officer every year or two. CFOs are supposed to be guardians of the financial gate, so when they leave, it's a good idea to know why. What's more, if a company is losing CFOs or other top execs with any frequency, you might also want to check local courts for wrongful-termination suits. Years ago I was tipped off that a former CFO of Supercuts, the hair-cutting chain, had filed a wrongful-termination suit against the company. He had, and it was full of allegations of improprieties. Turns out that CFO's predecessor filed a similar suit a year earlier. Supercuts' stock crashed, the CEO was kicked out, and the company eventually was sold.

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