Avoid These Highfliers to Boost Your Returns

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What is Warren Buffet'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 Hovnanian (NYSE: HOV) and Pinnacle Entertainment (NYSE: PNK) know what I am 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 investors have ranked more than 5,400 stocks, 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. I was looking for expensive stocks with low CAPS ratings:

• 1-3 star CAPS rating (out of five)
• At least 50 Underperform ratings in CAPS
• P/E ratio higher than 30
• Price/sales ratio greater than 2  

The search returned the following:

Company Name	CAPS Rating	Outperform Picks	Price-to-Earnings (TTM)	Underperform Picks	Price-to-Sales (TTM)
Capitol Federal Financial (Nasdaq: CFFN)	*	33	62.2	60	5.9
Centerstate Banks of Florida (Nasdaq: CSFL)	*	6	34	62	2.5
China Natural Resources (Nasdaq: CHNR)	*	211	42.5	117	8.5
Equinix (Nasdaq: EQIX)	*	89	389.9	53	3.5
Goldcorp (NYSE: GG)	***	1643	32.8	115	7.4

Source: Motley Fool CAPS as of Oct. 13, 2008. TTM = trailing 12 months.

I'll let you judge the worthiness of these potential investments, but personally, I'd rather own cheap stocks with five-star ratings like these than the expensive stocks with low CAPS ratings listed above. What about you?

In the coming weeks, 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. The service, which just launched, will rely heavily on proprietary CAPS "community intelligence" data to 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.