5 Warning Signs for Growth Stocks

It's no secret that I'm a fan of growth stocks. You'll find me spending most days studying and writing about tech's fast movers as a member of the Motley Fool Rule Breakers team.

That's why I can say this: Some growth stocks stink.

Psystar is a private company, but it illustrates the risks in some growth stocks. This company could be sued out of existence by Apple (Nasdaq: AAPL  ) for creating unauthorized clones of its Macintosh computers.

But this is about more than bad luck or even poor decision-making. I question whether Psystar was ever anything more than an extravagant fantasy. Why? Computerworld reports that the company, in a pitch to venture capitalists, claimed it would sell as many as 12 million machines in 2011. For perspective, consider that Apple sold 10.4 million Macs in fiscal 2009.

Ahem.

Does this remind anyone else of growth-gone-wrong stories of overpromising and underdelivering? Stock stories such as Crocs (Nasdaq: CROX  ) , Krispy Kreme (NYSE: KKD  ) , and Vonage (NYSE: VG  ) ? Sirius XM Radio (Nasdaq: SIRI  ) was dancing on this same precipice not long ago, and may still be promising more than it can deliver.

Say goodbye to this one
So in the spirit of the growth stories that went bad before it, I hereby offer a eulogy to Psystar that it didn't ask for and may not need, because court proceedings aren't finished. I'm taking the risk anyway. Here are my top five semi-serious signs you're investing in a fantasy grower such as Psystar:

5. The CEO always keeps a dictionary of superlatives handy.

4. Profit is always just a year away. Or so says the fax you just received from the company's stock promoter.

3. The (ahem) "market opportunity" involves a moon landing, buried treasure, and more stock options than are listed on the Chicago Options Exchange.

2. Executives have spent more money on paper for press releases than they have research and development.

And the No. 1 sign you're investing in a fantasy grower (drum roll, please) ... Dogbert was just named the new CEO.

See any I missed? Sound off in the comments box below. And if you know of any obvious fantasy growers, visit Motley Fool CAPS and give 'em a thumbs-down. It's 100% free to participate.

Apple is a Motley Fool Stock Advisor selection. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers had stock and options positions in Apple at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. The Motley Fool is also on Twitter as @TheMotleyFool. The Fool's disclosure policy needs a nap. (Yawn.)


Read/Post Comments (7) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 30, 2009, at 4:01 PM, SIRIDoom wrote:

    I just love SIRI.

    Waiting for the Rev-Split is like waiting for a thief to get your family silver and the TV...

    Come on Mel CarmaCROOK, stop ripping us off. You and that dam deal you made with Goldman Sachs has cost us too much. CarmaCrook is letting Goldman Sachs control SIRI stock. How much money do these crooks need? Wait, I know, I all it...

  • Report this Comment On November 30, 2009, at 4:48 PM, SIRIDoom wrote:

    I just love SIRI.

    Waiting for the Rev-Split is like waiting for a thief to get your family silver and the TV...

    Come on Mel CarmaCROOK, stop ripping us off. You and that dam deal you made with Goldman Sachs has cost us too much. CarmaCrook is letting Goldman Sachs control SIRI stock. How much money do these crooks need? Wait, I know, I all it...

  • Report this Comment On November 30, 2009, at 6:56 PM, dedmunds wrote:

    SIRI CEO MEL NO REVERSE SPLIT!!!

    GREAT NEWS FOR SIRI!!!

    BUY BUY BUY WHILE STILL CHEAP!!!

  • Report this Comment On November 30, 2009, at 6:57 PM, dedmunds wrote:

    SIRI,

    The bottom line:

    Cash flow is up enormously, The company recently projected cash flow (adjusted for unusual charges) of more than $400 million this year, compared with a loss of $136 million in 2008.

  • Report this Comment On November 30, 2009, at 7:01 PM, dedmunds wrote:

    SIRI,

    The bottom line:

    Cash flow is up enormously, The company recently projected cash flow (adjusted for unusual charges) of more than $400 million this year, compared with a loss of $136 million in 2008.

  • Report this Comment On November 30, 2009, at 7:03 PM, dedmunds wrote:

    Hey SiriDoom, I think if anyone worships Sirius its you.Admit it, Sirius haunts your life everyday & night.Your whole life revolves around Sirius.Face it Sirius will haunt you FOREVER, HA HA HA

  • Report this Comment On November 30, 2009, at 7:05 PM, dedmunds wrote:

    Hey SiriDoom, I think if anyone worships Sirius its you.Admit it, Sirius haunts your life everyday & night.Your whole life revolves around Sirius.Face it Sirius will haunt you FOREVER, HA HA HA

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