The Red Flag Alert Has Two Battleground Stocks to Avoid

Since I started the Red Flag Alert, I've been experimenting with various ways to source ideas of stocks to avoid... As a quick refresher, I do these alerts after spending decades building a reputation largely on reminding investors of the risk buried in the hype. It's something I think about whenever I'm recommending a stock […] Not rendering correctly? View this e-mail as a web page [here](. [Empire Financial Daily] The Red Flag Alert Has Two Battleground Stocks to Avoid By Herb Greenberg --------------------------------------------------------------- [24 words that killed the U.S. dollar]( At the 2023 World Economic Forum, Saudi Arabia's Finance Minister made a shocking announcement. After uttering just 24 words, it was clear he had just paved the way for utter disaster for the U.S. dollar. [Click here to see how to protect your money before year's end](. --------------------------------------------------------------- Since I started the Red Flag Alert, I've been experimenting with various ways to source ideas of stocks to avoid... As a quick refresher, I do these alerts after spending decades building a reputation largely on reminding investors of the risk buried in the hype. It's something I think about whenever I'm recommending a stock here at Empire Financial Research. If anything keeps me up at night, it's worrying about how I might have been bamboozled by a bullish story – something many investors lose sight of when stocks seem to be going up. Or when a stock has been so pummeled that it just naturally seems like a bargain, when it really may be a trap. The primary idea here is that []with thousands of stocks to choose from, there are likely better ideas than the ones that wind up in the "No-Buy Zone." One increasingly invaluable source has been the monthly screens developed by my friends at quantamental firm Kailash Concepts ("KCR"). By virtue of showing up on any one of those screens, a company has a higher probability of underperforming the market over the next 12 months. Hitting more screens ups the odds... So far, these screens have proven to be exceptional at identifying companies that have gone on to underperform the market in a surprisingly short period of time. A few have even plunged – one did so the day after my report, on unexpectedly bad news. One thing missing from my process has been a technical trading overlay to confirm the level of risk... For that, I turned to my friends at trading analytics platform Longbow, whose signals can suggest how a stock is likely to perform over the next 90 days. Enter Bloom Energy (BE) – the company manufactures fuel cells that produce electricity, with an increased focus on hydrogen... This month, it hit three KCR screens. That shouldn't be entirely surprising... For a few years, Bloom has been the center of a bull-bear battle – including a 2019 report by activist short selling firm Hindenburg Research. This was when Hindenburg was still relatively unknown – a full year, in fact, before it made headlines by poking holes in claims by electric vehicle ("EV") maker Nikola that (NKLA) it had produced a semi-truck that ran on hydrogen fuel cells. With Bloom, Hindenburg raised a number of issues – including allegations that the company overstated its financials. Bloom claimed Hindenburg's report was "false and misleading," and the stock went on to double during the market's pandemic-fueled melt-up. But Bloom has continued to be a magnet for controversy, much of it tied to the numbers... Look no further than how Bloom ranks in quality in the KCR small/midcap universe of stocks, where last month it was ranked 1,569 out of 1,578 companies. To be fair, that's an improvement over the prior month's bottom-of-the-barrel rank of 1,585 out of 1,585 stocks... but it's still bad. In fact, for months Bloom has been showing up in KCR's Russell 2500 "bottom 25 short" screen. Bloom has also been a regular on KCR's earnings manipulators list, with its so-called "M-Score" – a well-known tool used to identify manipulators – scoring 99% out of 100% last month... That's not good, which is why KCR views Bloom as a "possible manipulator." Here's where it gets interesting... In February, Bloom's M-Score was half that amount. But by April, it had leaped into the danger zone – the high 90s – which coincided with the stock's slide... It gets worse, because the third KCR screen Bloom showed up on this month was "unattractive debt," which suggests a topsy-turvy balance sheet and financial statements. The chart below shows Bloom's debt over the past two years... Bloom's debt is so dubious that the company landed even landed on KCR's "financially fragile" list, which I highlighted in the [August 25 Empire Financial Daily](. This is a list of companies that don't earn enough to cover their interest. --------------------------------------------------------------- Recommended Link: [This Is the Hottest Stock to Own (Before December 1)]( You better check your pockets. Because the Fed just launched a secret "Bitcoin Killer" that impacts every single dollar you own. With $73 trillion up for grabs, this "Bitcoin Killer" is behind my No. 1 moonshot investment of the year – packed with enough potential to turn a modest $5,000 into $450,000. [Click here for all the details](. --------------------------------------------------------------- And Bloom's debt is spiking in the face of negative free cash flow ('FCF'), negative operating income, and negative net income... That combo isn't generally perceived to be a good setup... in the very least, regardless of the "story," it suggests that Bloom is a financial high-wire act. At the same time, according to its public filings, Bloom's share count is also rising (in other words, shareholders are getting diluted) as the company has over time resorted to issuing more shares to raise additional cash. That's because the only way it appears to be staying afloat is by issuing new shares or new debt... or both. Since 2018, shares outstanding have roughly doubled... Something else to keep in mind: As of last quarter, three customers generated 70% of all sales. Such heavy concentration, regardless of the company, is always considered a risk. As with all companies, there are industry nuances that can make numbers look better or worse than they really are. But at Bloom, they're flashing in bright red neon. All of which gets us to what this means for its stock... Checking Longbow's trading analytics suggests high risk... and not just for longs, but shorts as well. On Longbow, momentum indicators are flashing "bearish" over the short term (less than three weeks) and medium term (less than three months). Here's the catch... At the same time, more than 15% of the float of Bloom's stock is already short. High short interest can be translated many ways. One is a warning sign for anybody who owns the stock because it suggests there really might be something wrong with the company. But it can also be a warning for shorts because good news could cause the stock to rally and force shorts to cover quickly – exacerbating (not to mention exaggerating) a potential rally. The bottom line: The numbers suggest that Bloom's story is much better than its underlying business. Even though its stock has already imploded and its trading momentum is bearish, high short interest suggests it's not worth trying to be long or short. There's simply too much risk either way. My view: Avoid. And for the Bonus Round, one more stock from this month's crop... Like Bloom, implantable eye lens manufacturer STAAR Surgical (STAA) has a history of being a battleground stock over the years. Roughly half its sales come from China, with only 5% from the U.S. For a few months, STAAR has shown up with some regularity on KCR's earnings manipulation screen as a possible manipulator... But the overall quality of its earnings and balance sheet have been tumbling to the point that STAAR now ranks 1,571 out of 1,579 small/midcap companies. The quality is so bad that this month STAAR also showed up on KCR's Russell 2500 "bottom 25 short" screen but also on the growth at a reasonable price ("GARP") short screen... a screen that's almost the inverse of GARP. That's a screen of companies with high expectations, the nosebleed multiples to prove it, and all kinds of other issues – such as possible earnings manipulation. On the plus side, STAAR has no debt. But trading at 61 times trailing earnings, it has negligible net income – the quality of which is iffy – and negative FCF. On, and one customer generates more than half all revenue. Like Bloom, short interest of 12% represents a risk for anybody short the stock if there's a stock-squeezing rebound. But if the shorts are right, it also can suggest risks for anybody long... even after STAAR has already swooned. Avoid. As I said earlier, with thousands of stocks to choose from, you can find far better ideas than the ones with businesses on shaky ground... In a market filled with hype and speculation, you're better off focusing on real companies with real businesses that generate real cash – the sort of safe, stable stocks I'm on the lookout for in my Empire Real Wealth newsletter. In fact, I've found another such company for the forthcoming issue of Empire Real Wealth, which is publishing this Friday after market close. If you aren't already a subscriber, you can find out how to put yourself on the list to receive this brand-new recommendation when it publishes by [clicking here](. Regards, Herb Greenberg September 11, 2023 P.S. As regular readers know, I spent most of my time doing short-biased reporting and research. So for the like-minded short-biased readers out there, what's your process for flagging stocks to avoid? Let me know via e-mail by [clicking here](mailto:feedback@empirefinancialresearch.com?subject=Feedback%20for%20Herb). I look forward to hearing from you. [Get a 30-day, 100% money-back trial to Empire Real Wealth by clicking here.]( --------------------------------------------------------------- If someone forwarded you this e-mail and you would like to be added to the Empire Financial Daily e-mail list to receive e-mails like this every weekday, simply [sign up here](. © 2023 Empire Financial Research. All rights reserved. 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