The stock market can be a wild space — filled with ups and downs and curveballs that not even master financial minds can predict. But one piece of wisdom that investors often follow is to resist bailing on the market just because things aren’t going great.
That said, there are times when parting ways with a select stock is the best move to make for your financial health, or at the very least, your level of comfort.
The Company Cuts Dividends
There are times when companies cut dividends to save on cash. This is a red flag for stakeholders.
“Companies tend to cut dividends when they see business slowing due to low footprint and consumer spending or when competition intensifies, and margins compress,” said Sankar Sharma, investing expert and founder of Risk Reward Return. “Dividends could be halved or could be cut completely. Shares start to slump when the dividend is cut.”
Insiders Sell Their Stock
When company insiders are flocking to sell their stock in the company, consider making the same move as them and dumping your investment in said company.
“[This] relays the message that the management is not confident about the future of their business,” Sharma said. “This has happened multiple times in the past. Smart investors need to pay attention to this.”
The Company Misses Earnings and Revenue
Keep in the loop of how much the company you invest in is raking in on a quarterly basis (all of this information is publicly available via the company’searnings callreports).
“When a company issues a profit warning or when they miss earnings or revenue or both, then it is often a sign to exit the stock,” Sharma said. “Lock in profits or cut losses without a second thought.”
Cash Flow Problems and Debt
“If [you] examine the company’s balance sheet and it shows negative cash flow year after year that is a red flag,” Shamar said. “If this kind of company has no means to bring in additional funds it is worth dumping the stock. Also, if the company has high debt, high service charges, low equity and no means to bring in additional capital it is again a red flag time to move on.”
The Company Issues Additional Shares To Increase Capital
Sometimes companies roll out additional shares at a discounted price to existing shareholders. Another red flag!
“They do this to weather a storm that is either brewing in the company or the company is anticipating,” Shamar said.
The Company Does a Reverse Stock Split
Small companies in particular tend to announce reverse stock splits. Another red flag, yes; but what exactly does it mean?
“A reverse stock split is also known as a stock consolidation,” Shamar said. “Companies do this to avoid delisting. A reverse stock split should be seen as a distress signal and investors should exit that stock.”
The Company Is Under SEC Investigation
You don’t want to mess around with the top dog in the financial space — the U.S. Securities and Exchange Commission (SEC), which plays a key role in protecting investors.
“When the SEC is investigating a company, it is a red flag until the issue is dealt with,” Shamar said. “It implies that the investor has overlooked risks that are existing or emerging. Time to exit the stock and move on.”
The Company Fails Clinical Trials (Most Relevant With Biotech Companies)
Biotech companies aren’t new, but they really started taking off as investment vehicles during the peak of the pandemic, when the pressure was on to develop a safe and effective COVID-19 vaccine.
When a company rolls out a clinical trial and that trial fails, that could indicate a serious problem for the company’s investors.
“This often happens with small-cap biotech companies,” Shamar said. “If the company is embarking on a clinical trial and it doesn’t have a pipeline and capital to sustain it often this is a red flag. If the trial fails at any stage that means the company has to go back to the drawing board and needs funds to sustain itself until they succeed.”
The Company Keeps Changing Its Management Team
It’s one thing to shake up management in a company now and then; it’s another to do it frequently. If you notice this trend, beware.
“Significant changes in a company’s management team, especially due to changes in governance structure, can be a critical sign in 2024,” said Wenyao Hu, Ph.D., C.F.A., assistant professor at New York Institute of Technology’s School of Management.
“In a rapidly evolving business environment, consistent and effective leadership is key to a company’s success,” Hu said. “When a company undergoes major shifts in its management team, it often reflects more profound issues such as strategic misalignment, failure to meet performance goals or internal governance problems. These changes can lead to uncertainty about the company’s future direction and stability. If these changes make you feel unsure about the company’s future, it might be a sign to sell your stock.”
Declining Supplier Performance and Reliability
Did you know that the performance of a company’s suppliers can be a key indicator of its future success? Indeed it can be, and this, Hu noted, is especially important in 2024, when global supply chains are tightly linked and easily disrupted.
“It could have a significant effect on a company’s production capabilities, cost structure, and, ultimately, its ability to make money if its key suppliers consistently underperform, are having financial problems or are experiencing disruptions like supply shortages or logistical problems,” Hu said. “This is especially important in fields that depend on unique materials or parts. Not only can bad supplier performance cause immediate operational problems, but it can also be a sign of deeper issues with the company’s strategies for managing its supply chain and being resilient.”
Stay Vigilant and Informed
At the end of the day, it’s critical that investors stay vigilant and keep a close eye on the performance and goings on of the companies they have a stake in.
“In a financial landscape that is ever-evolving, understanding these indicators is key to avoiding potential pitfalls and constructing a robust, profitable portfolio,” Shamar said. “Remember, successful investing is not just about recognizing risks but also about taking corrective steps. By staying informed and adaptable, investors can navigate the complexities of the market and make smart investing decisions.”
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.