Truth be told, spotting high-octane stocks isn't that difficult. There's the outrageous sales growth, the groundbreaking innovations, the extraordinary returns on equity. Such stocks tend to keep the market pinned for decades.
A Fool's Top 10
Of course, real Rule Breakers are rare. Disastrous fakers are anything but. Fortunately, the signs of impending doom are numerous. Here are the Top 10:
10. When asked how the growth is going, the CFO responds, "Surgery is scheduled for next week, thanks."
9. The company last filed its financial statements on time during the Carter administration.
8. The new CEO curses out an inquisitive analyst during the latest earnings call.
7. Management counts the cardboard in the trash bins in the back of HQ as assets available to fund expansion.
6. Guidance hinges on tomorrow night's lotto drawing.
5. The CEO is so desperate to raise cash that he issues a prospectus for his yard sale.
4. Annual bonuses are replaced with "the panhandler's starter kit."
3. The VP of sales cuts out of the quarterly conference call early so that he can go to work at his night job.
2. Human resources advertises for highly-trained Dumpster divers.
And the No. 1 sign that your stock is about to die ...
1. There's a cover charge to attend the annual shareholders' meeting.
Learn from losers
Joking aside, buying into a loser can be a disheartening experience. I should know; I've bought my share. But I've learned from the experiences and improved my detective skills. Even better, the winnowing process isn't too difficult. You can do it yourself. Here are three Foolish principles to get started, none of which requires a lick of math. (Sweet!)
Lesson No. 1: Find the moat, then get behind it
Every legitimate growth company has a defensible market position. Take Motley Fool Rule Breakers selection Akamai (NASDAQ:AKAM), for example. It is far and away the leader in the delivery of dynamic Web content, such as downloads and streaming media. That's thanks to a patented algorithm and a global network of more than 18,000 servers. Think that would be easy to replicate? Think again.
Lesson No. 2: Ally your portfolio with the right executives
Invested managements have a lot to lose. After all, much of their wealth is tied up with the businesses they run. Accordingly, they make for highly motivated executives. Take David Liu, CEO of The Knot (NASDAQ:KNOT), whose flagship website offers wedding help. He owns 4.8% of the company and has paced the stock to 45% returns for our Rule Breakers members. He's hard at work building the brand as well; the company recently signed a deal with offline media giant Knight Ridder (NYSE:KRI).
Lesson No. 3: Invest with energized staff and delighted customers
Does experience count for much? Jimi Hendrix thought so. So does John Mackey, CEO of Whole Foods (NASDAQ:WFMI). Mackey, though, is focused on customer experience. He's designed a company whose stores and employees so cater to customer needs that shoppers remain loyal even if it costs them a premium to do so. Companies such as Wal-Mart (NYSE:WMT), Target (NYSE:TGT), and Dell (NASDAQ:DELL), on the other hand, have built businesses predicated entirely on offering low prices. There's not a lot of brand loyalty there, particularly if a competitor comes along and offers lower prices or better products. For proof, consider Wal-Mart's recent move to leave South Korea.
The Foolish bottom line
Disaster may strike the stock market, but by focusing on buying the very best companies, you can avoid being a victim. These are exactly the types of companies we seek at Motley Fool Rule Breakers, and our recommendations are beating the market by nearly seven percentage points to date. If you'd like to check out our service and our research free for 30 days, click here. We're a bit rebellious in our search for strong moats, superior managers, and delighted customers, but your portfolio should thank you.
Fool contributor Tim Beyers only breaks the rules in his portfolio. Wimp. Tim owns shares of Akamai. You can find out what else is in his portfolio by checking Tim's Fool profile. Whole Foods and Dell are Motley Fool Stock Advisor selections. Dell and Wal-Mart are Inside Value picks. The Motley Fool has an ironclad disclosure policy.
