5 Stocks You Should Avoid Right Now

Back in March, we profiled five unbelievably solid stocks -- companies that have been paying uninterrupted dividends to shareholders for more than 45 years. That consistency is incredible.

Today, we thought we'd take the flip side of that coin and examine five stocks that are anything but incredible.

Why they are so dangerous
What first caught our eye about these five dogs is that they are among the most heavily traded stocks on our major exchanges:

Company

Average Daily Trading Volume, Past 3 Months

Recent Share Price

Citigroup (NYSE: C  )

796 million

$4.46

Bank of America (NYSE: BAC  )

227 million

$16.22

Freddie Mac

75 million

$1.36

Fannie Mae (NYSE: FNM  )

135 million

$1.18

AIG

43 million

$38.90

Source: Yahoo! Finance.

Millions upon millions of these shares have traded hands -- on a daily basis -- over the past three months. That might make sense; after all, every one of these stocks has headlined the nightly news at least once in recent months.

Now, we have to acknowledge two things. First, many of these transactions were from the big-money institutions or the short-term day-trading crowd. (Still, somewhere in there is the little guy.) Second, an earlier version of this column was published in April, and we were as bearish on these five companies then as now. One problem: Since then, the five companies we called out have mostly outpaced the market -- some up more than 70%.

Why you should stay away
While it's true that they've rallied of late, we believe there are better opportunities long-term. Speculators may be able to ride the momentum … but investors would do well to sit this one out. Why? Because these stocks have three troubling commonalities:

1. Convoluted relationship with the government.
According to the Center for Responsive Politics, the "Finance, Insurance, and Real Estate" industry spent more than $3.4 billion on lobbyists between 1998 and 2008 -- more than any other industry.

What did those five companies get for all of those political contributions? All have received well-publicized bailout funds. And while the taxpayer money will be used to save these companies from a far worse fate, Uncle Sam's money comes with strings attached.

Under normal circumstances, businesses are accountable to three constituencies: their customers, shareholders, and employees. Businesses will do well when they do right by all of them. These five companies, however, are now accountable to a supra-constituency: the federal government.

That frightens us, because it's unclear how customers, shareholders, and employees will fare when these companies try to do right by the feds. That's no doubt one of the major reasons why TARP recipients like Northern Trust (Nasdaq: NTRS  ) and US Bancorp (NYSE: USB  ) wanted to repay TARP funds so promptly.

2. Gordian knot-like financials.
Take a look at Citigroup's balance sheet. For all of the information, for all of the numbers, it's among the most confusing documents we've ever examined. Call us when you figure out what it owns and what it owes. Heck, call Citi CEO Vikram Pandit first.

See, it's seemed to us that as the credit crisis persists, insiders haven't been totally clear about what's on their books. Though some have a vague sense that mark-to-market accounting has forced them to write down asset values too far, only time will tell ... and time may not be on these firms' sides right now.

3. No near-term catalysts.
The financial companies will survive in some form -- our government has committed to that. But their future will be unlike their past. Regulation will be stricter. The massive 30-plus-times leverage that drove outperformance earlier this decade will be a dark relic of a bygone era. And now, skeptical investors may never ascribe the same market multiple to profits.

We just can't see a world in which these companies post the same kind of profits that we saw for the past 10 to 15 years.

What you shouldn't avoid right now
Contrast the future of Citigroup or AIG with, say, the future of these three efficiently run companies, each of which is trading at a discount to its five-year average:

Company

Current P/E

5-Year Average P/E

Motley Fool CAPS Rating

Laboratory Corp. of America (NYSE: LH  )

15.5

19.5

*****

Emerson Electric

15.9

18.9

*****

SYSCO   (NYSE: SYY  )

15.4

21.1

*****

Sources: Morningstar and Motley Fool CAPS. CAPS rating out of a possible five stars.

This isn't a formal recommendation of these companies -- and it's not to say that they each don't face challenges. But at least they're not encumbered by convoluted relationships with the government and convoluted financials. And they can continue with business as usual while the stocks listed above are figuring out ways just to maintain.

Buy one-foot bars
Heck, there may be value in one or all five of the stocks we've advised you to avoid -- in some cases, they've more than doubled from their lows. But given their complexity, they're the proverbial "seven-foot bars" that Warren Buffett says he avoids in investing.

Instead, Buffett looks for "one-foot bars that I can step over." In other words, layups, short putts, or fastballs down the middle (to diversify our sports analogy). These are easy investments where the reward profile far outweighs the risk profile.

Fool co-founders David and Tom Gardner have found all sorts of similar opportunities for their Motley Fool Stock Advisor subscribers. That, after all, is the silver lining of a down market, and if you're prepared to be a long-term investor, you can take advantage.

Click here to join Stock Advisor free for 30 days and enjoy immediate access to all of David and Tom's proprietary research. There is no obligation to subscribe.

Already a member of Stock Advisor? Log in at the top of this page.

This article was first published April 9, 2009. It has been updated.

Neither Tim Hanson nor Brian Richards owns shares of any companies mentioned. Laboratory Corp. is a Motley Fool Stock Advisor recommendation. SYSCO is an Income Investor and Inside Value pick. The Motley Fool owns shares of SYSCO and has a disclosure policy


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  • Report this Comment On October 26, 2009, at 4:23 PM, mktcorreo wrote:

    Hmm, isn't this article a week late? Considering the banks tank today I think you are just trying to get web hits after the news already happened.

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