It seems there are more things that can adversely affect a stock price than benefit it. A few key things to look for when analysing a company is its management, current share price, current balance sheets, future earnings and perhaps most importantly, the industry.
Lately, many ‘solid’ companies have fallen foul to poor industry conditions spurred on by weakening demand, slowing commodity prices and bad management decisions. It is said that if you can correctly pick 6/10 stocks that will make a gain, you’re doing pretty well. Here are five companies I would not consider buying right now.
Not long ago, in fact earlier this year, gold stocks were getting slammed. The price of the useless commodity was free falling. Currently, spot gold sits at a price of US$1,398.60 an ounce. This has taken a toll on some of Australia’s best gold companies, for example Newcrest Mining (NCM.AX). This company’s share price has slumped, dropping over 4.62% to $14.45 today alone, when in October last year its share price was at $30. I would be steering clear of this one in the short term and it seems I’m not alone, this morning UBS revised its price target to only $12.
The next one will come as no surprise to many investors as its goes from bad to worse almost every week. Billabong International (BBG.AX) was once one of the more reputable brands in Australia. In 2007 the company sported a share price of over $14, but now, after many failed takeovers, it is worth a dismal 23 cents with a market capital of only $110 million.
Another well-known Australian company is Ten Network Holdings (TEN.AX), which today is also showing investors how good it really is. In early trading this morning the share price is down a hefty 3.57% to $0.27. It seems stuck around this share price but I don’t know why. It has a current price to earnings ratio (PE) of 95, something reminiscent of the dot com bubble. As long as it airs programs like The Shire and Being Lara Bingle, it’s not going to tune into any savvy investors airways.
The last two stocks excel in areas where most companies are too scared to venture and it’s not hard to see why. Arrium (ARI.AX), formally OneSteel, and Fortescue Metals (FMG.AX) have a tough road ahead and unless overseas investors have the steely determination that these two possess, their share price is going to falter. What’s more, I wouldn’t trust either of the two pure iron ore companies to give shareholders what they really need.
Fortescue’s debt of 226% of equity is concerning to say the least. It is playing in a market of diminishing demand and excess supply, while still opening new mines. Arrium’s ‘diversification strategy’ involved it moving away from the distribution of steel products into the mining of it. The two will complement each other, however in hindsight, it was a poor move. In the past five years, Fortescue and Arrium’s share price has dropped 21% and 32% respectively, but the market isn’t getting any better.
If you picked these companies as the five to make up your portfolio, chances are you’re not going to do too well. It is unlikely, but some may turnaround and in 12 months be worth twice as much, but as an investor you must be able to hear warning bells loud and clear and identify the upside and the downside of stocks. Hedge your bets and take your time when picking a stock, after all you don’t lose money from being patient.
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Motley Fool contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies.