Stock Price Loss

When a company's stock takes a nose-dive, it's usually due to some bad
unexpected losses. Big losses usually lead to what's known as negative
cash flow, higher than expected inventories, and big write-offs. It's very
important that you check out the company's balance sheet.

It can take years for a company to straighten out all of the problems that
caused the losses. The balance sheet can be turned around, but it takes
time. Make sure that the stock you're looking at has corrected it's cash
flow and inventory problems.

Don't pay any attention to company reports that say the company is
about to have a profitable quarter. Those positive projections have been
known to never come true. "Trust but Verify", should be your motto. Wait
until the company releases positive and verifiable financials.

These positive numbers must be from real-world day to day continuing
operations. If the company shows good profits due to taking tax credits or
selling off parts of the company, then don't buy the stock. This is not a
real turnaround. It's just creative accounting.

I've said many times that you should never purchase any kind of stock
without first doing your homework. If someone tries to talk you into buying
a turnaround stock always ask for the financials so that you can verify
that the company is on the path to profitability.

It takes a lot of hard work for a company to turn itself around. Make sure
that you look only at companies that have the best chance to succeed.
By following the same fundamental principals used to evaluate any other
type of stock, you'll greatly reduce your risk.

Stay away from companies that can't obtain much needed capital directly
from sales. Many companies are in fields that require large amounts of
capital. Medical companies would be a good example. It takes a huge
amount of cash for research and development to bring a drug to market.

Many companies that become strapped for cash will resort to issuing more shares of stock to raise capital. Without the new infusion of cash they will go deeper into debt. Stay away from companies that fall into these categories.