You are previewing Predators and Profits: 100+ Ways for Investors to Protect Their Nest Eggs.
O'Reilly logo
Predators and Profits: 100+ Ways for Investors to Protect Their Nest Eggs

Book Description

Predators and Profits helps you uncover the kind of scandals that brought down Enron and Worldcom. Are problem stocks still lurking in your portfolio? Learn how to identify them, while there’s still time. Leading Reuters business journalist Martin Howell identifies more than 100 crucial red flags: hidden risks from greedy executives, sleepy boards, accounting shenanigans, and questionable corporate culture. It’s all public information: Martin Howell shows how to find it, assess it, and act on it.

Table of Contents

  1. Copyright
    1. Dedication
  2. Praise for Predators and Profits
  3. About the Author
  4. Foreword: What Went Wrong with Capitalism?
    1. Scraping the Barrel
    2. Perception vs. Reality
    3. Moral and Ethical Standards
    4. Character Counts
  5. Introduction: Raw Greed and Red Flags
    1. How to Use This Book
    2. Far from an Exact Science
    3. How Many Bad Apples? A Handful, a Barrel, or an Orchard?
    4. No More Heroes Anymore: Twisted and Conflicted Ties
  6. Acknowledgments
  7. 1. Sages and Charlatans: Avoiding the Fads, the Buzz, the Rip-Offs, and the Merely Dumb
    1. Red Flag 1: If You Can’t Understand, Don’t Invest
    2. Red Flag 2: Friends and Family Don’t Like a Company’s Products
    3. Red Flag 3: A Product or Company Is Hyped by Wall Street, the Media, and Others
    4. Red Flag 4: On Wall Street, the Game Is Usually Rigged Against the Small Investor
    5. Red Flag 5: The Motivation of an Adviser Making a Recommendation Is Suspect
    6. Red Flag 6: Price Means Everything: A Great Company’s Stock May Be Too Expensive
    7. Red Flag 7: Don’t Get Caught Out by the Latest Fad; It Probably Won’t Last
    8. Red Flag 8: If You See Major Funds Are Shunning a Stock, There’s Usually Good Reason
    9. Red Flag 9: Avoid Companies That Are Too Reliant on One or Two of Anything
    10. Red Flag 10: Diversify or Bust: Too Much Money in One Stock May Ruin You
      1. Ejecting at the 11th Hour
    11. Red Flag 11: A Company Files for Chapter 11 Bankruptcy Protection
    12. Red Flag 12: The SEC Launches a Full-Scale Probe into Possible Securities Fraud
    13. Red Flag 13: The CEO or Another Top Company Official Is Arrested
    14. Red Flag 14: A Company’s Shares Are Delisted by a Stock Market Such As the NYSE
    15. Red Flag 15: A Company Does a Reverse Stock Split to Remain Listed
    16. Red Flag 16: A Company Is Facing a Large Number of Class-Action Lawsuits
    17. Red Flag 17: A Prominent Short Seller Has a Company in His or Her Sights
  8. 2. Pipedreams and Big Lies
    1. Red Flag 1: When You Find the Big Lie, Everything Else Crumbles Around It
    2. Red Flag 2: A Whiz-Bang Device Is Loved by Tech-Geeks, but the Masses Are Unenthusiastic
    3. Red Flag 3: The Technology Is Great, but Its Price Is Too High for the Mainstream
    4. Red Flag 4: If a Technology Is Said to Transform the World, It Is Being Over-Hyped
    5. Red Flag 5: Journalists Are Often Wrong in Predicting the Success of a Deal or Product
    6. Red Flag 6: When Money Is Easy to Raise, Be Alert for Companies Doomed to Fail
    7. Red Flag 7: A Product Is Only Set to Reach a Niche, but Hopes Are Ramped Higher
    8. Red Flag 8: First Company to Market May Not Be the One to Succeed with a Product
    9. Red Flag 9: Technology Becomes Obsolete and Companies Can Easily Burn Up
    10. Red Flag 10: Be Wary of Chasing the Prices of IPOs Soon After They Start Trading
  9. 3. The Superstar CEO: Celebrities, Showmen, and Destroyers
    1. Red Flag 1: The Quitter: When a CEO Leaves without an Explanation
    2. Red Flag 2: When There Is Family Control, the Rights of Others May Be Trampled On
    3. Red Flag 3: Beware the Worst Combo of All: An Aggressive CEO and a Compliant CFO
    4. Red Flag 4: The CEO Bullies Everyone
    5. Red Flag 5: The CEO Hypes a Company’s Performance and Prospects
    6. Red Flag 6: A CEO Is Caught Making Misleading Statements
    7. Red Flag 7: When a CEO Is Abusive, It May Be a Sign of Major Problems
    8. Red Flag 8: A CEO Is Built Up As the New Star Who Is Going to Fix Everything
    9. Red Flag 9: When Senior Management Includes the Company’s Former Auditors
    10. Red Flag 10: When the CEO Is Known Best for Destroying Jobs and Slashing Costs
    11. Red Flag 11: A CEO Known Best As a Serial Acquirer Rather Than a Builder
    12. Red Flag 12: A CEO Who Blames Others for a Company’s Ills
    13. Red Flag 13: An Executive with a Dubious History: Beware Repeat Offenders
    14. Red Flag 14: When Executives Buy Homes in Bankruptcy Havens Such As Florida
  10. 4. Jets, Parachutes, and Stealth Wealth: Pay for Performance or Pay for Plundering
    1. Red Flag 1: CEO Compensation Is Not Linked Closely with Performance
    2. Red Flag 2: When Stock Options Are Handed to Executives Like There’s No Tomorrow
    3. Red Flag 3: When Top Executives Own Very Little of Their Company’s Stock
    4. Red Flag 4: If a Company Rewards Failure by Re-Pricing Stock Options
    5. Red Flag 5: If a Company Rewards Failure by Lowering Compensation-Linked Targets
    6. Red Flag 6: Executives Making Money for Themselves from Company Business
    7. Red Flag 7: When a Company Forgives Large Loans Made to Senior Executives
    8. Red Flag 8: Big Payments Are Made to Executives for Their Work on a Takeover
    9. Red Flag 9: When Boards Hand Out Massive Severance Packages to Failed Executives
    10. Red Flag 10: Executives Retire with Huge Packages, Including Costly Perks
    11. Red Flag 11: Companies with Golden Parachutes for Any Kind of Takeover
    12. Red Flag 12: If a CEO Is Protected by a Contract Even if Convicted of a Crime
    13. Red Flag 13: When a CEO’s Perks Are Excessive and Costly
    14. Red Flag 14: When a Company Pays for Private Jet Travel, Clubs, and Agents’ Fees
    15. Red Flag 15: If an Executive Is a Philanthropist with Shareholders’ Money
    16. Red Flag 16: When Executives Bail Out of Their Company’s Stock
  11. 5. Caffeine Badly Needed: Sleepy, Inept, and Tainted Boards
    1. Red Flag 1: Sudden Unexplained Resignation of a Director from a Board
    2. Red Flag 2: When the Board Rarely Meets
    3. Red Flag 3: When “Independent Board” Means the CEO’s Grocer Is a Director
    4. Red Flag 4: Boards Lacking Outside Directors Who Are Respected Business Figures
    5. Red Flag 5: Companies in Which the Chairman and the CEO Are the Same Person
    6. Red Flag 6: Professional Directors Who Are Keener on Collecting Fees Than Aiding Shareholders
    7. Red Flag 7: Boards That Have a Large Number of Long-Serving and Elderly Directors
    8. Red Flag 8: Too Many Academics and Ex-Politicians May Lead to an Uncritical Board
    9. Red Flag 9: A Compensation Committee in the CEO’s Pocket Lacks Independence
    10. Red Flag 10: Cross-Board Memberships Can Lead to Conflicts of Interest
    11. Red Flag 11: Directors Who Don’t Own Much of Their Company’s Stock
    12. Red Flag 12: When a Company Hits Low Points in Corporate Governance Rankings
    13. Red Flag 13: Audit Committees That Don’t Take Responsibility for Policing Auditors
  12. 6. Growing Mushrooms: The Art of the Opaque, Sneaky, and Buried
    1. Red Flag 1: A Press Release That Buries the Net Earnings Figure
    2. Red Flag 2: A Press Release Begins with a Questionable Measurement of Profit
    3. Red Flag 3: When the Earnings Table Is Produced in a Creative or Confusing Manner
    4. Red Flag 4: If the Press Release Omits a Cash-Flow Statement or Balance Sheet
    5. Red Flag 5: When the Company Treats One-Time Charges As if They Aren’t Real Money
    6. Red Flag 6: The Upbeat Tone of a CEO’s Comments Is Not Matched by Performance
    7. Red Flag 7: If a Company Has Had a History of Over-Optimistic Forecasts
    8. Red Flag 8: A Company Doesn’t Include Accounting Policy Details in Its Press Release
    9. Red Flag 9: Stock Options Accounting Policy and Its Impact Are Not Fully Explained
    10. Red Flag 10: Too Much of the Wrong Kind of Disclosure Can Bury Vital Information
    11. Red Flag 11: When a Company Says it Has Changed Its Revenue Recognition Policies
    12. Red Flag 12: Hidden Announcements of a Probe by the Government or a Regulator
    13. Red Flag 13: Disclosure of Major Litigation Problems or Reserves for a Settlement
    14. Red Flag 14: When a Board or CEO Treats an Annual Meeting with Contempt
    15. Red Flag 15: When a Company Tries to Bury Bad News on or Just before a Holiday
    16. Red Flag 16: When a Company Doesn’t Hold Conference Calls
    17. Red Flag 17: If a Call Is So Controlled That Probing Questions Are Not Addressed
    18. Red Flag 18: When the Press Is Barred from an Annual Meeting
    19. Red Flag 19: If a Company Delays Publishing Financial Results without Good Explanation
    20. Red Flag 20: If a Normally Talkative Company Official Suddenly Clams Up
    21. Red Flag 21: When Drug Companies Spin and Obfuscate the Results of Drug Trials
  13. 7. Culture of Greed: Sports Stadiums, Shooting the Messenger, and Rank and Yank
    1. Red Flag 1: When a Company Abruptly Transforms Its Corporate Strategy
    2. Red Flag 2: If a Company Fires a Whistleblower or Faces a Suit from a Whistleblower
    3. Red Flag 3: A Company Cuts Research and Other Spending for the Future
    4. Red Flag 4: A Company Doesn’t Handle a Crisis Directly or Quickly and Allows It to Fester
    5. Red Flag 5: A Company Hides Behind Anti-Takeover Devices and Ignores Votes to Change
    6. Red Flag 6: When Companies Are Legally Incorporated in Unusual Places
    7. Red Flag 7: A Company That Buys a Stadium, a Sports Team, or Their Naming Rights
    8. Red Flag 8: The Edifice Complex: Lavish HQs Can Signal Waste and Excess
    9. Red Flag 9: Companies That Treat Staff Ruthlessly May Signal a Screwed-Up Culture
    10. Red Flag 10: Companies Confronting Rather Than Talking to Pressure Groups
    11. Red Flag 11: When Unexplained Events Cast Doubt on an Entire Investment Story
  14. 8. Earnings Tricks and Games: Manipulating the Numbers and “Creative” Fraud
    1. Red Flag 1: Companies That Always Meet or Beat Earnings Expectations
    2. Red Flag 2: The Use of One-Time Gains from Asset Sales to Reach Earnings Targets
    3. Red Flag 3: When a One-Time Charge Becomes a Permanent Part of Results
    4. Red Flag 4: Companies Dipping In and Out of Cookie Jar Reserves
    5. Red Flag 5: Serial Acquirers Who Disguise Performance with the Next Big Deal
    6. Red Flag 6: Using Aggressive Pension Fund Assumptions to Reach Earnings Targets
    7. Red Flag 7: Companies That Talk of New Paradigm Measurements of Performance
    8. Red Flag 8: Beware of Companies That Use Risky Stock Hedging Strategies
    9. Red Flag 9: When Net Profit Is Rising but Cash Flow Is Declining or Negative
    10. Red Flag 10: Now, a Contradictory Warning—Cash Flow Can Also Be Manipulated
    11. Red Flag 11: A Company Grows Much Faster Than Its Rivals with No Clear Explanation
    12. Red Flag 12: When Earnings Growth Is a Lot Faster Than Sales Growth
  15. 9. Goosing, Stuffing, and Faking: Tricks of the Trade to Drive Revenue Up and Costs Down
    1. Red Flag 1: Any Signs That Companies Are Reducing Costs by Capitalizing Them
    2. Red Flag 2: When Companies Depreciate Assets over an Unrealistically Long Time
    3. Red Flag 3: Fabrication Is Possible When a Company’s Top Customers Don’t Check Out
    4. Red Flag 4: If a Company Pumps Out Too Many Goods in a Particular Period
    5. Red Flag 5: When a Company Is Taking Longer to Convert Sales into Cash
    6. Red Flag 6: Companies Bringing Forward Revenue from Longer-Term Contracts
    7. Red Flag 7: Companies That Record Bogus Revenue Achieved through Swaps
    8. Red Flag 8: Beware of Companies That Record the Entire Value of Trades As Their Revenue
    9. Red Flag 9: Companies That Indulge in Barter Deals Should Raise Suspicions
    10. Red Flag 10: When Companies Provide Vendor Financing, It Can Backfire
    11. Red Flag 11: If Companies Use Their Own Assumptions to Assess the Value of Contracts
    12. Red Flag 12: When Plane Makers Use Wrong Assumptions to Spread Project Costs
    13. Red Flag 13: When Construction Companies Include Disputed Cost Overruns in Revenue
  16. 10. Beyond Their Means: Balance Sheet Clues That May Stop You from Losing Your Shirt
    1. The Balance Sheet and Those Beloved Footnotes
    2. Red Flag 1: If There Is Any Sign a Company Retains Risks from Off-Balance Sheet Items
    3. Red Flag 2: Avoid Anyone Boasting About Using Financial Engineering to Reduce Debt
    4. Shot by Both Sides: The Credit Rating Agencies
    5. Red Flag 3: Rating Agencies Cut a Company’s Long-Term Debt to Junk Status
    6. Red Flag 4: A Rating Downgrade Triggers Obligations, Such As Debt Repayments
    7. Red Flag 5: When a Company’s Debt Levels Are Much Higher than Those of Rivals
    8. Red Flag 6: When a Company Has Large “Contingent” Liabilities
    9. Red Flag 7: When Insurance Against Defaults on Bonds Goes through the Roof
    10. Red Flag 8: A Company Whose Return on Capital Is Below Its Costs of Funding
    11. Red Flag 9: When the Interest Coverage Ratio Drops Below One-to-One
    12. Red Flag 10: When a Company Is Rapidly Burning through Its Cash
  17. 11. Snakes and Ladders: Spinning, Flipping, and Walking through Wall Street’s Walls
    1. Taming the Beast
    2. Red Flag 1: When an Analyst Doesn’t Kick the Tires or Even Read a Company’s Filings
    3. Red Flag 2: If an Analyst Hypes a Stock or Uses Superlatives to Describe Management
    4. Red Flag 3: When an Analyst’s Estimates and Recommendations Often Don’t Pan Out
    5. Red Flag 4: When a Highly Reputable Analyst Cuts a Rating, It Is Often a Sell Signal
    6. Red Flag 5: When an Analyst Stops Covering a Company without Notice
    7. Red Flag 6: You Are Probably Behind Wall Street’s Top Clients on Research News
    8. Red Flag 7: Buying Hot IPOs After Trading Begins Is an Easy Way to Lose Your Shirt
  18. 12. At the Scene of the Crime: Funds Became Part of the Happy Conspiracy
    1. Red Flag 1: Your Mutual or Pension Fund Has Clear Conflicts of Interest
    2. Red Flag 2: Funds That Won’t Tell You How They Are Voting Your Shares at the Time of the Decision
    3. Red Flag 3: Funds That Don’t Issue Shareholding Information Every Month
    4. Red Flag 4: Funds That Play Cloak and Dagger Games with Fund Managers’ Identities
    5. Red Flag 5: When a Fund Manager Quits Suddenly, Especially if No Clear Reason Is Given
    6. Red Flag 6: When a Fund Management Firm Is Dropped by a Big Pension Fund
    7. Red Flag 7: Lowered Ratings from Morningstar or Lipper
    8. Red Flag 8: When a Fund Has a History of Moving Away from Its Advertised Intentions
    9. Red Flag 9: When the Shareholder Letter Is Merely Used As a Sales Tool
    10. Red Flag 10: Managers Who Divert Hot Stocks into One Fund at the Expense of Another
    11. Red Flag 11: High Fees That Suck Up Returns, Especially in a Bear Market
    12. Red Flag 12: Advertising That Boasts of Stellar Returns over a Short Period
  19. 13. Where Were the Auditors? Counting Fictitious Beans
    1. Red Flag 1: The Auditor Suddenly Resigns or Is Fired without a Good Explanation
    2. Red Flag 2: The Auditor Questions Whether a Company Can Survive
    3. Red Flag 3: A Company Restates Its Results
    4. Red Flag 4: Companies That Answer Criticism by Stressing Compliance with Accounting Rules
    5. Red Flag 5: When an Auditor’s Record Suggests Lax Practices or Conflicts of Interest
    6. Red Flag 6: If an Audit Committee Hints at Internal Conflicts or Accounting Concerns
    7. Red Flag 7: If Management Doesn’t Seem to Care Much About Internal Controls
    8. Red Flag 8: If a Fraud Is Declared, Expect News to Get Grimmer As More Is Uncovered
    9. Red Flag 9: A Warning from the New Auditor Watchdog
    10. Red Flag 10: Beware of Accountants Who Are Promoters of the Latest Business Fad
  20. 14. Media Munchkins and Masters: Separating Puff Piece Writers from Hard Diggers
    1. Red Flag 1: If a Top Publication Exposes Dubious Accounting or Corporate Behavior
    2. Red Flag 2: Magazine Covers and Awards Aren’t an Aid to Smart Investing
    3. Red Flag 3: Journalists Who Fail to Ask the Hard Question
    4. Red Flag 4: Be Aware That Some Media Commentators Also Trade Stocks
    5. Red Flag 5: Take Media Popularity Polls with More Than a Pinch of Salt
    6. Red Flag 6: Speed Requirements Can Leave Reporters Open to Hoaxes
    7. Red Flag 7: News Reports That Only Rely on Analysts Who Provide a Very Narrow View
    8. Red Flag 8: Details of a News Report May Have Leaked Out Before Publication
  21. 15. Abstention to Follow Addiction: When Disenchantment with Low Returns Hits Home
  22. A. Tips for Handling Your Broker, Financial Adviser, or Financial Planner
  23. B. A Glossary for Investor Survival