Investors beware: blue-sky promises carry no proof of future profits

Investors need to be careful about companies that depend on undeveloped projects and technologies or new industry dynamics for future profits, according to Chad Padowitz, chief investment officer at Wingate Asset Management.

“Any company that has a big blue sky element has a corresponding higher risk component and is usually using capital to survive while new activities [are] developed ... And new capital will continue to be hard to find,” Padowitz said.

“More often than not, the market will provide an opportunity at some future time to buy such companies – if they survive – on a realistic valuation based on products or services actually being delivered,” he said.

Padowitz said investors need to be much more selective in choosing stocks to avoid risk.

He also warned about companies carrying heavy debt, as some could still fall over because the consequences of the credit crunch are “still lurking”.

“Access to capital, equity or debt is likely to be difficult to find for companies with a poor trading record or a decline in business because of the recession, and they may struggle to roll over existing debt,” he said.

Investors should look to invest in companies that are still making a profit and trading well, and investigate if company assets are overvalued, he said.