With the recent market weakness, I think it prudent to follow up on what’s become a regular (and popular) feature. You see, while I mostly focus my attention on finding little-known, innovative companies that have the potential to deliver mega-returns to investors, I’ve consistently made the case that a big part of successful investing is often about what not to buy as well as what to buy.
The selloff in the stocks I spurned in this piece turned out to be much more devastating than in the market itself (which was horrific on its own). In the weeks between November 26 and December 26, the S&P 500 index declined 8%. During the same period, Diamond Offshore (NYSE: DO ) lost 21.9%, Anheuser-Busch InBev (NYSE: BUD ) lost 13.2%, Avon Products (NYSE: AVP ) dropped 23.5% and Frontier Communications (NYSE: FTR ) lost a whopping 35.4%.
I would still stay away from all the above companies. To be sure, BUD is the best of the group. This is clearly a dominant company in its sector. Plus, BUD just teamed up with Canada’s Tilray (Nasdaq: TLRY ), a medical marijuana company, to develop pot-based drinks — a long-term positive. However, the company’s recent debt downgrade will make further borrowing costlier (Moody’s downgraded BUD’s senior debt by one notch, to Baa1 from A3 on Dec. 10). Moreover, beer sales, which account for about 80% of Bud’s revenue, are flat. Then there’s a possibility of another dividend cut (BUD halved its dividend on Nov. 6). All told, BUD is a “Hold” at best, even at its current levels.
General Electric (NYSE: GE ), the best-performing loser of the group (down 2.5% during this period), has managed to nearly stem its multi-year slide. Having jumped more than 5% on November 19 on news that the company intends to IPO/spin off its health unit, the stock also garnered support when a couple of previously bearish analysts — Vertical Research’s Jeffery Sprague and JPMorgan’s Steve Tusa — upgraded the stock, declaring a bottom in the shares.
Recent action in GE notwithstanding, it’s clearly more dangerous to invest in stocks with weak fundamentals in today’s market than it was just a few months back.
5 Risky Stocks
So, in my search for more companies that investors should avoid, I pointed my radar toward companies where the risk/return balance is skewed toward the “risk” end of the equation, even if they have already lost some of their market value in the recent selloff. The result: five companies with slowing growth, weak fundamentals, extended valuations or expected negative triggers.
Here is a list of well-known companies likely to underperform the market…
Ireland-based Mallinckrodt (NYSE: MNK ) lost nearly a third of its value this year and is seemingly very cheap. But its forward P/E of only 2 indicates trouble. This company is one of the makers of opioid painkillers, and, as such, faces several probes and many lawsuits. Opioid makers are accused of misrepresenting the risks and benefits of their product, and their future sales are in question. Avoid.
Known for its hip and knee transplants, Zimmer Biomet (NYSE: ZBH ) is much more than just orthopedics. But its core business has fully matured, and its expected revenue growth is extremely slow (only 0.6% in fiscal 2019, down from 1.4% this year and 2.6% in 2017). And profits are likely to stagnate, too, due partly to gross margin pressure. Until there are signs of acceleration, stay away from this stock.
Formerly known as Valeant Pharmaceuticals, Bausch Health (NYSE: BHC ) is debt-laden and slow growing. The company is trying to execute a turnaround, but I think it’s too early to take a bullish stand there.
Johnson & Johnson (NYSE: JNJ ) just cannot leave its asbestos-related troubles behind. There are reports that the company was aware of the presence of asbestos in its baby powder since the 1970s. And even if those reports don’t prove to be true (or cannot be proven), the company faces thousands of claims and may have to pay as much as $20 billion to resolve them. I would avoid JNJ as well.
And Shake Shack (Nasdaq: SHAK ) , which trades at a P/E of 60, is way too expensive for a restaurant, albeit a fast-growing one. While SHAK continues to expand, there are signs of market saturation in some of its target areas. Let’s stay away from this stock for now as well.
Introducing: Our Predictions For 2019 (And Beyond)
Since we’ve covered stocks you should avoid, let’s get to the fun part…
For the last decade our team at Game-Changing Stocks has released annual predictions that have left many readers stunned by their accuracy. Some wondered if we had some kind of crystal ball on the market… others asked if we had some sort of inside information. We just put the finishing touches on our 2019 predictions report — and you’re not going to want miss out on what we’ve found. Details here .
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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