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Step 1
Find a company or multiple companies with many outstanding junk bonds. Companies that are likely to be able to honor their debts--and increase in profitability--should demonstrate profit growth over the past few years. If the company's price to earnings ratio on their stock has been declining steadily for the past few years, it's a bad sign, particularly for a junk stock (see Resources below).
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Step 2
Evaluate overall market or sector conditions. Track the performance of relevant stock market indexes along with the stock performance of other similar companies in the sector. Junk stocks, like junk bonds, tend to perform better in strong bull markets with an easy credit market. When credit contracts, it becomes far more difficult for companies with already precarious debt problems to successfully dig themselves out of it.
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Step 3
Monitor the company's corresponding junk bonds. If the value of the company's bonds are decreasing rapidly, the stock price generally follows soon after. You can often predict stock price moves in advance by watching movements in the bond market carefully.
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Step 4
Prepare to sell junk stocks to meet corresponding junk bond rallies. This should net you a tidy profit so long as the stock is above the point at which you first purchased it.
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Step 5
Protect yourself from sudden crashes in your junk stocks. While junk stocks are not quite as risky as junk bonds, the companies that have a lot of low-grade debt tend to be highly leveraged, and as such are very vulnerable to creditor pressure. These companies are precarious, and it would be wise to protect your holdings by issuing stop-loss orders to prevent extraordinary losses.
