Innovictor
New Member
The key to profitable stock trading/investing activities is to have more winning stocks than losing stocks in your portfolio. Now, the best way to ensure that you have potential winners in your portfolio is to know how to spot and avoid potential losers.
Hence, this piece is written with a view to intimating you about the 4 types of stocks that should avoid in 2015. It is of utmost importance that you have the right stocks in your investment portfolio because 2015 is set to be highly volatile for Nigerian stocks.
Stocks with Inconsistent Revenue and Earnings
Before you invest in a stock, you should check that it has solid business fundamentals and a good way to know if a stock has solid fundamentals is to examine its financial statements over the course of the last 5 to 10 years. Your aim when looking through the financial statements of the last 10 years is to know if the company has been consistently increasing its revenue and earnings.
If the company has consistently increased revenue and earnings over the last 10 years, you can be reasonably sure that it has a very good chance of delivering decent revenue and earnings in both bull and bear markets. Hence, you can be sure that the concept of capital preservation will hold in the worst-case scenario.
However, if the company cannot boast of consistency in its revenue and earnings over the last 10 years, the stock has high chances of reporting dismal performance in a bear market. Hence, you'll be better off avoiding such a stock.
Stocks with High Level of Debt
The second type of stocks to avoid is those with very high debts or high debt-to-equity ratios. Most companies will need to obtain debt or sell equity for capital expenditures; however, profitable companies tend to keep their debt profiles low.
As the Nigerian economy is being impacted by falling oil prices, we can expect banks to tighten their lending policies; hence, Nigerian companies would have a hard time securing credit facilities. However, companies that have low debt profiles will be able to stay afloat financially while companies with high-debt profiles will have negative cashflow. Hence, you are better off avoiding Nigerian stocks with high debt profiles
Great Stocks that are Overvalued
Another type of stocks to avoid in 2015 are great stocks that are currently overvalued. Great companies would in no doubt look very attractive because they have a very good chance of delivering on the top and bottom lines in these uncertain times.
However, you should not jump and buy up shares of great companies blindly just because everybody was buying them last month. The fact remains that the current market scenario will not permit overvaluation in stocks; hence, most overvalued stocks will lose a part of their share prices if the current bearishness in the market persists. Hence, it might be better to avoid buying overvalued stocks now and then, wait to buy them on the dip after a pullback when they will most likely be reasonably valued.
Mediocre Stocks that Appear Cheap
The last type of stocks that you should avoid this year is the stock of companies with bad business fundamentals but with apparently cheap share prices. You might be tempted to think that you are buying such stocks at a bargain but the fact remains that companies with bad business fundamentals do not have anything to offer you, especially not in a bear market.
The fact that the company has bad business fundamentals is already reflected in the share price and such a stock has only one place to go, LOWER. Hence, you are better off avoiding stocks with bad business fundamentals irrespective of how cheap the share price looks.
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