Quick! What is Warren Buffett’s first rule of investing? That’s right: “Never lose money.” Buffett is all about investing in situations where his risk is low. Investing is hard enough as it is, and Buffett doesn’t want to expose himself unnecessarily to additional risk.
Plus, losses can ruin your returns. Investors in JetBlue (Nasdaq: JBLU) and Las Vegas Sands (NYSE: LVS) know what I'm talking about.
How can I avoid such losses?
One good way is to consult The Motley Fool’s CAPS stock-rating database before you buy a company. In CAPS, more than 115,000 people rank companies, which are then given a rating of one to five stars. Motley Fool data shows that the one- and two-star stocks have underperformed the market, so if the stock you are interested in shows up on that list, you may want to think twice.
To get you started with a few names to avoid, I punched a few criteria into the CAPS screening tool, looking for expensive stocks with low CAPS ratings:
- One- to two-star CAPS rating (out of five)
- At least 50 "underperform" ratings in CAPS
- P/E ratio higher than 30
- Price/sales ratio greater than 3
The search returned the following:
|
Company Name
|
Current CAPS Rating (5 max)
|
Underperform Picks
|
Outperform Picks
|
Price-to-Earnings (TTM)
|
Price-to-Sales (TTM)
|
|
Bankrate (Nasdaq: RATE)
|
**
|
60
|
206
|
37.3
|
5.5
|
|
Investors Bancorp (Nasdaq: ISBC)
|
*
|
51
|
19
|
100.0
|
5.1
|
|
Kimco Realty Corporation (NYSE: KIM)
|
*
|
74
|
119
|
31.2
|
8.6
|
|
Lululemon Athletica (Nasdaq: LULU)
|
**
|
83
|
298
|
40.6
|
3.6
|
|
Urban Outfitters (Nasdaq: URBN)
|
**
|
114
|
504
|
30.1
|
3.5
|
Source: Motley Fool CAPS, as of Oct. 3, 2008
I’ll let you judge the worthiness of these potential investments, but I personally would rather own cheap stocks with five-star ratings like these instead of the expensive stocks with one- or two-star ratings listed above. What about you?
On Oct. 7, 2008, Fool co-founder David Gardner and his Motley Fool Pro team will invest $1 million in a portfolio designed to help you make money in any market. In the coming weeks, the team, relying heavily on proprietary CAPS "community intelligence" data, will establish long and short positions in a broad range of securities, including common stocks, publicly traded put and call options, and exchange-traded funds (ETFs). To learn more about Motley Fool Pro and to receive a private invitation to join, simply enter your email address in the box below.
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