Avoid Being Snared by Growth Traps With These 3 Red Flags

[TradeSmith Daily]( Avoid Being Snared by Growth Traps With These 3 Red Flags I was flipping through television stations recently when I came upon an old Western film. The story centered on some gunslinger and his noble quest for redemption. It’s a common-enough scene from the turn of the century. But what caught my eye was the traveling salesman character — a man with flashy clothes and a booming voice claiming that the elixir in his hand will cure anything and everything. Shutterstock This “snake oil” trope is a familiar one, and not just because you’ve seen it on the big screen. Years later, Wall Street’s top investment houses would follow similar tactics, bilking fortunes from unsuspecting investors. Though laws and regulations helped temper the problems, excess leverage and speculation continue to overtake the market from time to time. In the 1990s, dot-com stocks left a trail of scorched earth as they screamed higher. Yet most didn’t generate any revenues, let alone profits, so it wasn’t much of a surprise when the bubble burst. Looking at the market today, a new kind of speculation is forming around when a bottom will happen or if we have already reached one, with the idea that growth stocks have never looked so appealing. But as our Health Indicator suggests, even if some growth stocks have fallen 30%, 40%, or even 50% over the last year, that doesn’t mean you should rush out and buy them. It’s called the growth trap for a reason. Stocks can always get a lot cheaper than they are now, especially ones that don’t have a lot going on “under the hood” when you do a close analysis. The good news is that you don’t have to fall into a growth trap and lose your money... so long as you know these red flags to watch out for. RECOMMENDED LINK [💼 Briefcase Secret could Make You a “Bear Market Millionaire” 💼]( For most investors, it’s become impossible to find a “safe haven” for their money. Gold... tech stocks... bonds... mutual funds... NOTHING is working. The rules of “smart investing” are being rewritten faster than ever before... And yet — somehow — stock-picking legend Mike Burnick has managed to string together [this ridiculous 100% win rate...]( He sat down for a recent interview to discuss this bizarre new era... Which he calls “The Great Flatline” — along with his #1 investing secret for the 2020s — [something he brought to the interview inside his briefcase](. [Click here to watch his telling interview]( Growth Trap Red Flag No. 1: They Aren’t Original The first sign that a company is a growth trap is it repackages an existing business without creating a competitive advantage. Robinhood (HOOD) is the poster child of a poor business model. All it did was steal market share by selling a product below cost, forcing every other broker to give up profits to match its prices. Now, Robinhood has nothing to make it special. Carvana (CVNA) is another great example. This company literally created a car vending machine so that customers could test-drive and purchase vehicles without interacting with another human being — and without having to pay the salaries of people who work in a traditional car dealership. When you stop and think about it, that’s pretty stupid. Sure, the gimmick is cool, but from a cost standpoint, the company needs to save enough on personnel costs to make money, which it doesn’t. For the last decade, CNBC and the business world have hailed players such as Robinhood and Carvana as “disruptors.” A better name would have been “thieves,” because many of these growth names simply stole market share. Every single one of these companies found some temporary cost advantage or promotional point of differentiation and used that to sell products below cost in order to capture market share. That’s why many of them have seen their shares obliterated in the last several months. Now, there are some that sit in a gray area, such as Uber (UBER) and Netflix (NFLX). These companies reinvented taxis and television, and they did bring key competitive edges to the table. Uber’s software and gig-economy workforce unlocked a whole new set of efficiencies and labor in traditional logistics networks, and Netflix not only delivers original content but was one of the first to leverage internet streaming. However, those advantages only took them so far, as both now struggle with market saturation. Netflix recently saw its subscribership decline for the first time in more than a decade, while Uber’s share of the U.S. market has tapered off to 69% since reaching 74% in September 2017. Unless they continue to find ways to distinguish themselves from their competitors, these trends are unlikely to reverse in the long term. Growth Trap Red Flag No. 2: Not Enough Cash to Pay the Bills Companies go through three stages of profitability: - Generating cash from operations - Recording a profit on its P&L (profit and loss) statement - Generating free cash flow (operational cash minus capital expenditure) They don’t always go in this order, but they do more often than not. Businesses that can’t pay the bills can’t survive for long. Any company that doesn’t generate cash from ongoing operations is in danger of bankruptcy. It can only borrow so much, and the more shares it issues, the more your holdings are diluted. Robinhood, for example, hasn’t turned a profit since its IPO — most recently reporting a net loss of $392 million for the first quarter of 2022 — and has no free cash flow to speak of. Companies that hit all three stages of profitability AND grow revenues are the ones to watch. Now, there’s one more growth trap red flag you need to watch out for. Growth Trap Red Flag No. 3: Slowing Growth If the majority of a company’s value is predicated on growth, what do you think happens when that growth slows down? It all depends on how strong a company’s fundamentals are. Lower demand for products and waning interest in subscriptions, for example, is a bad sign — especially if a company doesn't have particularly strong profit margins to begin with. Meanwhile, a quarter with slower revenue growth is never favorable for a company’s near-term outlook. But while a mature, profitable company might be able to hold out and turn things around, that same circumstance could be a death knell for an up-and-coming business. Faltering growth is the last thing that shareholders want to see. And if a company has feeble fundamentals, what might otherwise be a minor bump in the road can easily turn into a major long-term drawdown. RECOMMENDED LINK [Millionaire Trader Makes Stunning Warning to 263 Million Americans…]( This is a defining moment in America... We’ll see a new class of millionaires rise as a new class of middle America falls to poverty. CNBC reports 263 million people alone could be pushed into extreme poverty in 2022. But millionaire Jeff Clark says “I’ll be fine – as well as the 170,000 folks I’ve helped discover a trading secret that could cash out big returns in ANY market. Because I simply ignore all 6,000 stocks in the market...” Recommending gains of 100%, 373%, and [390% in just 8 days]( in bullish AND bearish conditions. Today, Jeff reveals this trading breakthrough, 100% free. A secret used to recommend [triple-digit gains over 48 times]( and double-digit gains over 81 different times. [Click Here To Watch]( The Bottom Line Growth costs money. With interest rates on the rise, that cost is even higher. Don’t be fooled into thinking that just because Peloton trades below $10 it’s a steal. Remember, many of the dot-com companies went bankrupt. I don’t know that we’ll see such widespread destruction. But I wouldn’t be surprised if some of these growth trap companies aren’t around in a year or two. Rather than getting myself in trouble trying to pick the bottom, I’ll wait until I get a clear signal from a backtested system that I have faith in — like TradeSmith Finance’s market health indicators. Our market health indicators factor in key “under the hood” metrics like a stock’s Volatility Quotient (VQ%) to show you, at a glance, how healthy an opportunity is so you can make data-driven decisions. Let me give you one last piece of advice before you go: If you get that urge to buy a stock in a downtrend, [send me an email](mailto:keith@tradesmithdaily.com). Explain why you like the stock and what makes it a buy at that price. You’ll often find that just the act of writing out the justification can help you stay out of trouble. Enjoy your Wednesday, [Keith Kaplan]Keith Kaplan CEO, TradeSmith P.S. Forget chasing stocks to the bottom; if a company can’t pay its bills, it can’t deliver profits. And believe it or not, right now, there are as many as 3,318 stocks screaming “crash alert.” Do you own any of them? Every publicly traded stock contains a unique four-digit “Cash Out Code” that warns of crashes and reveals the best time to sell your stock to maximize any potential profits. [Click here to learn the Cash Out Code for every stock you own]( for a chance at gains of up to 1,429%, 3,024%, or even 3,713%. Best of TradeSmith The chart below represents the best-performing open positions over the last two years, as recommended by our software. [Download now on the Apple Store]( [Get It On Google Play]( [866.385.2076](tel:+866-385-2076) | support@tradesmith.com ©TradeSmith, LLC. All Rights Reserved. You may not reproduce, modify, copy, sell, publish, distribute, display or otherwise use any portion of the content without the prior written consent of TradeSmith. TradeSmith is not registered as an investment adviser and operates under the publishers’ exemption of the Investment Advisers Act of 1940. The investments and strategies discussed in TradeSmith’s content do not constitute personalized investment advice. Any trading or investment decisions you take are in reliance on your own analysis and judgment and not in reliance on TradeSmith. There are risks inherent in investing and past investment performance is not indicative of future results. TradeSmith P.O. Box 3039 Spring Hill, FL 34611 [Terms of Use]( [Privacy Policy]( To unsubscribe or change your email preferences, please [click here](. [tradesmith logo]