Red Flag Alert – How You Would Have Fared if You Had Avoided These Stocks

An almost 5-month status report on 15 companies. And a Bowlero update...

When I joined Empire Financial Research two years ago, the idea was to take everything I learned researching possible shorts as a way to find longs...

As I wrote at the time, "I don't want to be the grumpiest guy in the graveyard."

Since then, in my paid newsletters I’ve enjoyed green-flagging the stocks of genuinely good companies.

These are companies like Weatherford (WFRD), which was just out of bankruptcy at the time... Allison Transmission (ALSN), which was dinged for not being ESG.. or even Novo Nordisk (NVO), recommended just as the drug-induced weight-loss craze was getting underway.

Readers who followed the recommendations on Weatherford and Allison Transmission in my QUANT-X System newsletter are up 174% and 46% since March 2022 and June 2022, respectively... and readers of my Empire Real Wealth newsletter who bought Novo in September 2022 are up 84%.

That's fun.

Oh, don’t you worry – I have more than my share of losers, too. But I'm convinced they'll eventually be winners – much better buys at lower prices than when I launched coverage.

You know what else is fun?

Sticking true to who you are. No matter how hard you try, your DNA is your DNA.

As much as I like finding stocks that will go up, my DNA is wired to be skeptical if not downright (some might say) cynical...

It’s who I am, and it plays into a stock market that is set up to reward blind bullishness.

A big part of making money is avoiding losing it. Put another way, identifying "stocks to avoid" is as important as finding stocks to buy.

That's why I started the Red Flag Alert (“RFA”)...

This is where I highlight stocks that deserve to be red-flagged.

I launched the RFA on May 9. You can see what I’ve written so far by clicking the “Red Flag Alert” button at the top of this page.

Here’s how the stocks that I've flagged have performed so far, as of Friday...

In addition, Tupperware (TUP), Cava (CAVA) and Sweet Green (SG) might as well be on this list. They’re down more than 50%, 40% and 20%, respectively, since I turned the spotlight on them over the past two months… just not under the RFA banner. Going forward, single-stock warnings will bundled under the Red Flag Alert.

Here’s the thing…

Even stocks of dubious companies don’t usually fall as much and as fast as these stocks have.

I (half) joke that by publishing this list I'm probably jinxing myself. If history is any guide, their rapid declines could very well be a sign this market – with as little conviction that it has – is at an inflection point and could spring higher. Historically, when my red flags start making me look smart – and people start paying attention – watch out!

But it doesn't really matter because in the short term, these stocks can have a mind of their own... and very possibly could be great trades on both sides. That’s up to them…

The concept of the Red Flag Alert is straightforward: With thousands of stocks to choose from, unless you’re an active trader, why pick these?

Or as my friends at the quantamental research firm Kailash Concepts wrote a bit more bluntly – in bold – in a recent report on highly leveraged companies that don't earn enough to cover their interest payments...

This just isn't complicated. If you own these fragile firms, we encourage you to ask yourself "WHY?"

That's because the best way to make money is to avoid losing it, and stock avoidance is as important as stock selection.

That's a very basic and simple concept that more often than not gets lost in the noise...

I started the Red Flag Alert mostly for fun, in part because I missed that part of what I’ve done for decades.

But I also strongly believe knowing what can go wrong is as important as knowing what can go right.

That’s why I think something like the Red Flag Alert should be part of every investor’s bag of tricks. It’s like insurance: Nobody likes it but they’re glad they have it if they need it. If nothing else, it might make you double-up on your own research… and you might gain even more conviction – or have a view that whatever issues I raise will be meaningless years down the road.

Data has played a big role in my idea selection…

Most of the ideas so far have come from mixing and matching stocks that are ranked lowest on various monthly quant screens published by Kailash. In theory, these are all the most likely to underperform the market over the next 12 months… maybe longer.

Screens like those are a jumping off point for further research, of course, and can be false-negatives or positives... but so far they’ve proven to be a solid source of ideas.

Ideas have also starting to find their way to me the old-fashioned way: Through friends, readers, and my rekindled network of sources.

If you have any ideas you think might be worthy of being red-flagged, don't hesitate to pass them along. Just beware: I do my own work before I publish and I have a very high rejection rate, missing more than a few good ones along the way. Some just catch my interest more than others. It’s the intangible of investing and picking which stocks to research.

I’m not here to tell you how to trade. I’m here to tell you what you need to consider as part of whatever trading decision you make.

Where does this fit with my goal of not being the grumpiest guy in the graveyard? It’s hard to be grumpy if you’ve helped people avoid losing money.

Speaking of the Red Flag Alert...

Last Thursday's report on Bowlero (BOWL) sparked reader feedback, including this one from Scott W., who wrote…

"Aloha Herb! I love your writing. This report cracks me up. C'mon really? Bowling alleys are collectively owned as a publicly traded company? They are the ashtrays of America with overflowing trash cans. What else is possible? Caveat emptor. And bowlers don't speak Latin."

Herb comment: Now, now, Scott... I know bowlers who speak Latin. But your point on publicly traded bowling alleys is a good one, since they've never worked in the past.

Away from the mailbag, there was also this exchange on the old Twitter, now known as X, in response to my post on Bowlero..

To double-check what he was saying, I went to set up a reservation for a “family” at a San Diego area Bowlero. I wasn’t just stunned, but gobsmacked…

When I was a kid growing up in the southwestern part of Miami, the bowling alley was next to a roller skating rink. (For those wondering, it was Bird Bowl on Bird Road. It’s still there, but the skating rink is gone.)

Bowling and skating were cheap ways to spend a Saturday afternoon… or any day in the summer to get out of the heat and humidity.

Bowlingheritage.com / circa 1956

Based on its website, Bird Bowl offers extremely competitive prices that are lower than Bowlero’s.

Granted, I haven’t been to Bird Bowl in probably five and a half decades, but if you do a search on “when did bowling get so expensive?” there is no shortage of stories. That’s because by any standard, in any decade, in any galaxy, $171.84 for four people to go bowling on a Saturday afternoon is absurd. Not sustainable, either. Something surely has to give.

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DISCLAIMER: This is solely my opinion based on my observations and interpretations of events, based on published facts and filings, and should not be construed as personal investment advice. (Because it isn’t!) I do not hold a position in any of these securities.

Feel free to contact me at herbgreenberg@substack.com. You can follow me on Twitter and Threads @herbgreenberg.