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Too often, investors miss out on major red flags until it's too late -- but with the benefit of hindsight, a pattern of deteriorating financials typically isn't hard to spot in a stock that's taken a significant dive. The challenge, then, is to know what to look for
before your shares get shellacked.
That's becoming even more important as we get further into the summer. Historically, summer is a period of comparatively poor equity market performance, a fact that we're now seeing this year with the end of 2013's primary uptrend in June. A weakening stock can get buoyed higher by indiscriminate buyers in a bull market, but that doesn't carry over when the bears come out. When the broad market's in a downtrend, deteriorating firms are all but guaranteed to get sold off hard.
Today, we'll attempt to spot the red flags in
four big names before that happens.
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We're looking at a combination of highfalutin metrics that point to money problems for companies. To make our list, a stock has to has to meet three out of these four red flag criteria: a bankruptcy prediction formula called Altman's Z-Score that registers at less than 1.8 (that indicates financial distress); rising CDS spreads, indicating that institutional investors are pricing in a higher probability of bond default; and dropping sales and inventory turnover.
That quantitative approach to finding out red flags avoids the bullish bias that's historically put blinders on investors. So, without further ado, here's a look at
four red-flag names to sell this summer.
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