Although most retail investors understand the importance of understanding financial reports and the need to avoid landmine stocks, understanding financial reports is the most important way to protect oneself. However, one of the differences between retail investors and legal entities is that the latter will read financial reports while the former will not. But not being able to read financial reports does not mean that one cannot identify landmine stocks. This article will teach you six tips to safely avoid landmine stocks.
1、 Avoid stocks that have fallen below their face value
Investors should not think that stocks that have fallen below their face value are cheap. Stocks that cost 7-8 yuan often go against the trend and drop to 3-4 yuan. If the stock price is allowed to sink below face value for a long time, there may be significant fundamental issues. Major shareholders themselves are not optimistic about their own stocks, so why take risks to invest in such stocks.
2、 Avoid stocks that fall below their conversion price
The stock price is lower than the convertible bond conversion price. Usually, companies issue convertible bonds to raise funds in preparation for converting debt into equity, reducing debt ratios, and improving financial structures. Otherwise, simply issuing corporate bonds would suffice.
If the price difference cannot be provided for convertible bond holders to convert, that is, at maturity, investors only want the company to repay the money and do not want to convert it into company stocks, convertible bonds will become debt, exacerbating the already high debt ratio.
3、 Avoid stocks that fall below their net asset value per share
The number obtained by subtracting liabilities from assets is called net asset value (also known as shareholder equity), and the net asset value per share is also the price that a normal company's stock price should adhere to. Long term decline below net asset value per share is a strange phenomenon, which may indicate that this figure is unreliable. The reason for the unreliability of net asset value per share is mainly due to overvaluation of asset value and undervaluation of liabilities. The situation of overvaluation of assets often occurs in the valuation of risky assets such as accounts receivable and inventory. In the worst case, all A/R may become bad debts, and all inventory may become bad materials, worthless.
4、 Avoid stocks with the departure of the CFO
Besides the stock price speaking, changing the CFO should be the most important thing to pay attention to. A well-known company has been struggling to find a CFO. In the past four years, there have been five changes in the Chief Financial Officer, which is not an unprecedented record. An investment advisory manager stated that the company had asked him about his intention to become the CFO last year, but when he heard that the CFO changed every year, he had the courage to take up the position.
5、 Avoid changing accounting firm stocks
Changing accounting firms is also worrying. The law stipulates that accountants must be replaced every four years, so changing accountants is not like changing a CFO, which can be nerve wracking, but changing accounting firms is a big deal. A company will go down the path of changing agencies, indicating that there are already agencies that are hesitant to apply for visas.
6、 Avoid stocks with low holdings by directors and supervisors
The low shareholding of directors and supervisors also means that major shareholders do not even care about their own stocks, and investors holding such stocks should be careful. Analysts emphasize that the worst-case scenario is that directors and supervisors may even add insult to injury or sell stocks at low prices. Generally, listed companies use holding companies to buy and sell stocks. If even the shares of the holding company are cleared, and the idea of directors and supervisors holding shares is finally used, investors will avoid it unless someone takes over the management rights.
