6 Warning Signs Investors Should Look Out For! Things Might Be About To Go Wrong With Your Stock If You See Them

There’s plenty of Warning Signs Investors Should Look out for in investing. The trouble is that they are only ‘signs’ and not definitive proof that things will go wrong. Often, they may not be a problem in their own right…but many companies that turn out to have problems will have had these signs without investors giving them a second thought. There’s too many to mention, but we’re going to mention 6 in particular that we reckon can be interpreted as a sign for investors to stay away.

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6 Warning Signs Investors Should Look out For!

Directors selling shares

Sometimes, directors selling shares can be a catalyst for a decline as was the case with Dronshield earlier this month. But sometimes, if everything else is going well, investors can brush it off. For instance, Dean Mintz has sold over $300m in shares in Cettire since he listed including $127m in 2024 at $4.63 per share right before the company’s decline began over questions about the company’s business model – specifically where it stood in relation to customs duties.

Often companies will tell their shareholders that it is to welcome new institutional investors onboard, or to improve liquidity in the stock, or even to diversify the boss’ portfolio. At the end of the day, would they be selling if they saw further upside? Granted, there may be good reasons to sell like a tax bill, but it is often a warning sign.

Gap between growth in like for like sales and raw growth,

This warning sign and the next one are inter-related as they put forward the same question: Is the company really growing, or only growing because it is acquiring new businesses or opening new outlets? This first red flag is common in the retail sector where you’ll see companies report like for like sales and underlying sales. Like for like sales is an adjusted figure taking into account changes in store footprints. Our long time readers would know we are not the biggest fans of ‘adjusted’ figures, but this is actually a case where adjusted figures give a great picture. Because it is far easier for a company to grow sales 20% if the company increased its store footprint by 20%.

Too much M&A

DGL (ASX:DGL) is a poster child for this, and to a lesser extent WiseTech (ASX:WTC). M&A deals will naturally increase a company’s revenue…but at what cost? Investors saw DGL as a fast growing business, and liked the fact that it was founder-led and majority owned by its founder. But the reality that investors realised is that it was only growing because it kept buying businesses

Auditor policies

This can be having any auditor other than the Big 4, or perhaps changing auditors very often. This may not seem like a big deal to lay persons unfamiliar with the work auditors do. But we hope the recent saga surrounding Corporate Travel Management (ASX:CTD) has been a wakeup call – basically, the company has been in suspension for months now because no one knows which of its two previous auditors’ policies were right. And those with longer memories may remember Enron.

It is easy to dismiss these as rogue cases but consider this – the auditing profession is dominated by the Big 4 and so often, companies stick with them for years (they can only change with shareholder approval).  If you’ve never heard the name of a company’s auditor before, it should raise eyebrows. And it also should if a company is changing auditors all the time.

Multiple directors quitting at once

It isn’t often that multiple directors quit at once of their own accord. But when they do, something is up – it is probably the biggest of all the red flags in this article. If often indicates that they cannot see eye to eye with their colleagues, or perhaps even that there was a power struggle and that they conceded defeat. This happened with WiseTech.

Dependant on the number of walkouts, this may trigger an automatic suspension of the company’s shares because it is mandatory to have at least 3 directors, at least one of whom must be Australian based. A company may quickly resolve this by hiring newbies, but it won’t just appoint anyone…it’ll appoint people who won’t speak up against those who remain there.

Resisting outside scruitany

Again, this is a broad warning sign but may include not speaking to the media – as was a red flag with Cettire for a long time; it may also include companies not willing to answer your questions. It also may include if companies are harsh in response to any criticism. It is a particularly bad sign when it happens by surprise.