Categories Capital efficiency

On finding companies that are failing in the eyes of investors.

I recently sat down with Christian Fife. We talked about finding companies that might fail in the eyes of investors. In other words, how does regular Joe figure out which companies seem to be failing in the eyes of investors? Christian shared six different ways of finding such companies.



Number one: declining share prices.


This one is quite straightforward. You look at the companies share, valuation history, and look at whether it’s declining relative to its competition or major indexes like the New York Stock Exchange index. If the share price has been declining over a long period of time, then that’s a sign that the company might have execution issues. On the flipside, one must be aware that share prices might decline for reasons attributable to the sector in which the company operates rather than reasons within the company itself.


Number Two: Shares Sold by Management


Key management includes board members and executive committee members. If one of these members or several of them start selling shares, then that might be a sign that something in the future might lead the company’s shares to decline. Now, where would one find such information? Perhaps on the NASDAQ investor relations database, the Bloomberg terminal and other market databases.


Number three: The consolidated opinion of the sell side analyst.

At the end of each report analyst will recommend either to:

  • buy shares,
  • sell, shares,
  • hold shares.

Some financial analysts might use slightly different labels, but the gist does not materially change. If they are, for example, 20 analysts providing recommendations, then, rather than looking at any specific recommendation, look at the consolidation of the recommendation of all analysts. If, overtime, more and more analysts are recommending to sell, the company shares and this, the number of analysts recommending to buy the company shares is decreasing, then that’s a sign that the company seems to be failing in the eyes of investors. Now, one can look at that specific analyst’s recommendation to get more detail as to the rationale for the downgrade. But the idea here is to capture the consolidated view and the way it changes over time.


Number Four: Rating Agencies


Christian recommends to look at the major rating agencies, including Standard and Poors, Fitch, and Moodies. These companies tend to rate companies and decide on whether a company has investor quality or not. When a company’s rating is downgraded, that’s a sign that the company has accumulated too much debt, and might be failing in the eyes of investors by not being capable to reimburse debt it has incurred.


Number five: Increasing activist behavior.

One can also look at the kind of investors that are buying a company shares. If there are more and more activists, then that’s a sign that a company is considered to:

  • be mismanaged
  • be engaged in a poor strategic direction,
  • lack capital efficiency.

One would capture the increasing number of activists in an investor database.


Number six: Increasing short selling.

What is short selling? Investors sell a security, in the hope to make a profit by predicting that the company’s current value will decline. In other words, the idea is that you sell something you don’t have, hoping that the value of what you are selling will decrease overtime such that you will make money when you sell it.

Where does one find such information? On NASDAQ and Bloomberg terminal.

Short selling is happening every day but the relative abnormal activity increase is another potential indication of a company failing in the eyes of investors.


In short, regular Joe can look at 6 metrics to assess whether a company is failing in the eyes of investors:

  • Declining the share price
  • Shares sold by management
  • Changing analysts’ recommendations: buy, hold, sell
  • Rating agencies
  • Increasing activists behavior
  • Increasing short selling

While none of these taken individually is necessarily reflective of any real risks and could be perfectly explained, the accumulation of negative signals from these indicators across all metrics should tell any prospective investor to be on high alert and thoroughly identify root causes before taking action.



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