Mellody's Math: Avoiding WorldCom Bomb
July 23 -- With the market's dismal performance these days, now is not the time to add insult to injury to your portfolio by investing in companies with nonsensical financials, unfound promises of exponential growth and a corporate agenda absent of customer satisfaction — think WorldCom, Enron and Global Crossing.
If your portfolio suffered at the hands of Wall Street's fallen angels, you were not alone in missing the significant signs previewing their falls from grace.
In fact, before executives at WorldCom were raising the perennial white flag to the SEC and Wall Street, multiple red flags were waving rampantly at investors and analysts alike.
The question for investors is how to recognize these red flags and do something before the company is in the headlines of every major newspaper and it is too late to react.
The Tell-Tale Signs of Trouble
Recently, Wall Street has had it shares of mirages with company profits in a state of "not really there."
As a shareholder of a publicly traded company, you are sent annual and quarterly reports disclosing earnings and all related information. In addition, most public companies send their shareholders proxy statements with additional details about business activities often soliciting your approval.
If you have the time to read the manual for your DVD player or shop online for the best airline ticket prices, you probably have time to read the annual reports for your investments.
In these "tell-tale" letters, here is what to look for and avoid:
Put-Together Companies: While acquisitions are often key components of growth and expansion, they should never be the meat and potatoes of a company's growth strategy.
The greatest businesses in America have not been put together through a series of acquisitions, but instead have grown from the bottom up.
For example, some of America's strongest brands, like McDonalds, General Motors, Walgreen, and Wal-Mart rarely acquire companies outside of their core business or use acquisitions to substantially drive growth.
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