I know I may have sounded like the “voice of doom” for the past few months – I recommended selling SalesForce.com (NYSE: CRM) back in March.

That trade turned out very well. CRM was down almost 40% since then.

A few weeks ago, I talked to you about Activision (Nasdaq: ATVI). The stock is relatively flat since that article but, in my opinion, the company is still looking weak.

Now, don’t take this the wrong way; I’m still very bullish on the tech sector as a whole. Subscribers to my service, Tech Stock Insider, will attest to the fact that I’ve continued to buy stocks in this market.

Granted, I’m being a bit more careful than most folks, and I’m not out there buying stocks every day. But I feel that one of the best things I can do for you is not so much to help you make money, but rather to stop you from losing money!

Your brokers will never be the ones to say, “Ok, stop buying stocks, don’t trade today.” It’s in their best interest to have you continue going long and generating commissions for them.

That’s one of the main reasons why many of us here at Tycoon Publishing left Wall Street. We felt this was one of the only ways we could provide objective, high-quality research for individual investors like you.

So in keeping with the theme of “portfolio protection,” I’d like to talk to you about another stock that I think could hurt you in the coming months if it’s lurking in your portfolio.

The company’s name is Verisign (Nasdaq: VRSN).

This company is the leading supplier of “secure certificates” on the web. A “Security Certificate” basically allows web sites to accept credit card transactions over the web in a safe and secure manner. Verisign also allows people to register domain names – for example, “thetycoonreport.com” is a domain name.

Typically, businesses like these are stable and secure. Everybody needs to register domain names and everybody who wants to sell things on the web needs a security certificate.

But this company is showing several red flags that are making me think 2006 won’t be a great year for its business or the stock.

For starters, the company has been on an acquisition binge over the past year, recently spending almost $400 million acquiring three mobile content and infrastructure companies.

Basically, the company is trying to shore up its revenue and earnings because its core business is declining. Never a good sign!

And when I dig deeper into the numbers, I notice some more troubling pieces of information.

For one thing, the company’s “Accounts Payable” (money it owes to vendors) has increased by over 30% year-over-year. That means the company used to owe its vendors a dollar, but now owes them $1.30 .

Now, this wouldn’t be a terrible thing if we saw a commensurate increase in sales, but that’s not the case at all! In fact, Verisign is showing a slight decrease in sales year-over-year.

This means that the company is basically deferring payments to its vendors in order to boost its profits. It’s like not paying your rent right away so you can pay off your credit card bill first … not a healthy way to manage capital, especially if you’re a large organization with thousands of shareholders.

The company is also seeing its profit margins and return on equity decrease. This is what really separates a good acquisition strategy from a bad acquisition strategy – and in turn separates the good managers from the bad.

Good managers know how to allocate capital – period!

Meaning, they know where to invest their money. If you see a company buying a bunch of other businesses and Return on Equity going down, it means that management is buying the wrong businesses.

Let me tell you what I mean …

Let’s say you’re a loan shark. You have $10,000 to loan to people every week. There are two customers who come to you for money. We’ll call them ‘Customer A’ and ‘Customer B.’

Now, you know Customer A will pay you 10% interest, and Customer B will pay you 6%. Who do you loan your money to?

Customer A, obviously! That’s proper allocation of capital!

Now, if you had a business doing 20% Return on Equity – would you ever buy another business that does 10% Return on Equity?

I wouldn’t either, but for some reason corporate managers feel that this strategy makes sense as long as it adds to the bottom line. They couldn’t be more wrong. Companies that have higher returns on equity stand a better chance of surviving a business cycle downturn and they are usually awarded with higher stock price multiples over longer periods of time.

The bottom line is this: If a company’s Return on Equity is dropping after a series of acquisitions, you’ll have to question management’s competence.

Companies are like cars – don’t let managers drive drunk!

So here’s the situation in a nutshell:

On top of all that, the valuation is a bit rich – it’s trading at a P/E of 22 and a Forward P/E of 25. For a company with all of these factors working against it, this stock price definitely makes me a bit uncomfortable.

So if this stock is in your portfolio, think long and hard about selling it. I wouldn’t want another “SalesForce-dot-Bomb” to happen to you!

Until next time …