Brian Stoffel

Brian Stoffel



Some stocks are STRONG BUYS when they fall Other stocks are SELLS when they fall How can you tell the difference? Here are 5 financial yellow flags to help you out...

1) GOODWILL This represents the premium a company pays for an acquisition above its fair market value. If there’s lots of goodwill on the balance sheet, that’s troubling

If there’s a major goodwill write-down on the balance sheet, it’s a smoking gun. When this happens, it means management has wasted a TON of capital.

Recent example: Teledoc $TDOC $14B was a lot in goodwill to begin with. A $6B write-down is awful, too. Buying Livongo at its price tag = HUGE mistake

2) Gross Margin Declining Gross margin = (sales) - (cost of goods sold). If I run a lemonade stand, it’s (money I earn) - (the supplies to make lemonade)

Declining gross margins could mean 1⃣The competition is eating away business and I lower prices 2⃣People aren’t that interested in my product anymore Either way, it can be a thesis-busting development

Recent example: Beyond Meat $BYND The company's gross margin has been cut in half. Some of this has to do with product mix (consumer vs restaurant buying). But it's not the whole story. Meatless-alternatives are EVERYWHERE now (for cheaper prices)

3) Deteriorating Balance Sheet This includes: - less cash - more debt - higher inventory As this happens, a company becomes more fragile.

Recent example: Peloton $PTON In the summer of 2020, it had 💵$1.8 billion in cash 🔴$0.5 billion in debt 🚲$0.2 billion in inventory Today 💵$0.9 billion in cash 🔴$0.9 billion in debt 🚲$1.4 billion in inventory

4) Excessive Stock-Based Compensation (SBC) Lots of companies pay their employees with cash. On the surface, that’s smart – no money leaves the company’s bank. Shareholders are diluted, but if it results in better results from happy employees – that’s a fair trade.

However, sometimes, that compensation gets out of control. The dilution becomes excessive. It also presents a problem: if the stock tanks, employees may want to be paid in cash instead of stock -- leading to booming operating expenses.

Recent example: Twilio $TWLO Over the past year, SBC = 20% of revenue. And it's steadily rising over the past few years.

The result: the number of shares outstanding is up 121% since the company went public. Some of this has to do with an acquisition. But either way, long-term shareholders now own less than half of what they paid for a few years back

5) Net Income is MUCH higher than free cash flow Remember: Net income uses accrual accounting. This smooths things out over time. Free cash flow uses cash accounting. This is a more realistic narrative of money flows

If a company has much higher net income, it’s possible a cash crunch is on the way, leading to fragility. When tough times hit, you want cash on hand – not promised by someone who may-or-may-not pay you back

Recent example: Netflix $NFLX Over the past year, it has 🧮Net income of $5.0 billion 💰Free cash flow of ($0.03 billion) That's a difference of over $5 billion!

The problem: If things don't work out as planned, the accrual accounting can't save you. And that's what's happening 👉Competition willing to spend big on content is heating up 👉Subscribers are *leaving* the service

You MUST know how to find these yellow flags to be a long-term investor. That's why @BrianFeroldi and I are excited to announce our first ever LIVE course: The roster for open spots is only open for two more days! Interested? DM me for a coupon code

To review the 5 yellow flags 🟡Lots of goodwill 🟡Gross margin declining 🟡Rapidly deteriorating balance sheet 🟡Excessive stock-based compensation 🟡Significantly more net income than free cash flow

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