While not a huge company Poseidon Concepts was a very widely held retail stock, in part because the deep-thinkger at CPMS had it as a top pick (CPMS is a computer based stock picking system used by a lot of brokers). Investors got slaughtered on this one, which had now degenerated into an accounting scandal.
But there were clear and obvious signs, as The President’s Club Investment Letter made clear starting 7 months ago.
First, insiders dumped a huge amount of stock from the fall of 2011 to the spring of 2012. Given that the company was only recently spun off from Open Range at that time, it was a red flag:
The second one was margins: at 90% they were just too high to assume there would not be intense competition, especially given lack or proprietary information. High returns guarantee competition.
Third, drilling activity was slowing down, especially in the Bakken, suggesting that Poseidon would have to chase customers to get business, and compete harder, meaning lower prices. This was easy to verify with a Google search.
Fourth, and perhaps most important, was rapidly rising accounts receivable. In the third quarter of 2012 they surged $75 million compared to nine months earlier: