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Investment Red Flags – Bad Beneish Score

How negatively does a bad Beneish score affect your portfolio?

 

With all of the recent articles regarding red and green flags, I realized I should begin writing articles on the flags within the score. One such flag, the bad Beneish score, is a key component of the red flags score.

The line item, “Bad Beneish Score” within the red flags score is calculated by using the above editor.

  • The Beneish M Score over the trailing 12 months (The most recent calculation) must be greater than 0.
  • The Beneish M Score over this past year (Two quarters behind the T12M calculation) must also be greater than 0.
  • The company must not be classified as a Depositary Receipt

    Returning a total of 133 matches – some of whom are household names – there are a fair number of companies that you should be wary of when looking at new potential investment opportunities.

    Now, I don’t expect you to just take my word for it, especially since there are some pretty big names in that list, like $TSLA. So let’s go ahead and see how well this strategy performed over the past 22 years.

    There was a slight spike during the dot-com bubble but those gains were quickly wiped away. You then spend the next 17 years kissing the breakeven line without actually seeing a profit.

    Just losing money over the past twenty years doesn’t automatically classify something as a red flag. There are plenty of losing strategies that just caught a bad break. We want to make sure that this screener is consistently selecting companies that have a high probability of dropping in price. As a standard, we want to make sure that, of all positions taken on by the strategy over the past 22 years, at least 50% of them have lost money. Here our results are a little worse.

    To add insult to injury, this red flag is fairly accurate at predicting companies that will eventually be delisted – and not because they are doing wonderful share buyback programs, but because their companies have become almost completely worthless.

    Red flags aren’t for finding investments – whether it’s a long or short idea. Instead, view them as warnings for companies. By utilizing these flags, you will ultimately cut down on your analysis time as you will be able to more easily kill off bad ideas and focus on putting research into the best possible prospects.

Tyler McCain
Tyler McCain
A student of finance at Georgia State University, Tyler has had a passion for the world of finance for as long as he can remember. Joining the Equities Lab team in 2015 he attempts to juggle the perfect mix of school, work, and giving back to the community. When he isn't working at Equities Lab he can often be found helping teach programs at the Rosen Family Foundation - a non-profit that teaches financial literacy to middle and high school students.

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