Beating the stock market involves picking winners, but it also involves knowing which losers to avoid. With that in mind, I recently asked a group of our top analysts this question:
Name a group of stocks investors should avoid right now.
Let’s get right to their answers.
Rick Munarriz, Fool contributor and Rule Breakers analyst
It's hard for me to get excited about the video game industry. Sales have been plunging for over a year now. Connectivity is giving the great games longer playing lives, but the appetite isn't there outside of tent-pole releases. Free or nearly free social and casual games through Facebook or Apple's App Store are eating at the finite leisure time. The options aren't as intricate as console titles, but they're good enough for the masses.
The biggest stinker in this group has to be GameStop
Alex Dumortier, CFA, Fool contributor
Since I've been banging the drum of high-quality, large-capitalization stocks, it stands to reason that I am less enthusiastic about stocks that share the opposite characteristics, i.e.,low-quality, small-capitalization stocks. Small-cap stocks have outperformed large-cap stocks by approximately 4% so far this year, although that gap narrowed significantly in June. I don't see small caps holding on to that outperformance through the end of the year.
One way to think of a company's quality is in terms of its debt load: Higher leverage magnifies risk and, thus, equates to lower quality -- particularly in a recovery that is threatening to turn deflationary. For the same reason, I consider that companies in cyclical sectors are inherently lower quality than those in defensive sectors.
Two examples of small-cap stocks in cyclical sectors that are highly leveraged and relatively expensive: Landry's Restaurants and Quiksilver. I can't be certain that they will turn out to be poor investments, but those characteristics aren't statistically attractive; it would require quite a bit of bottom-up due diligence before I'd be comfortable overruling this initial assessment.
Tim Beyers, Fool contributor and Rule Breakers analyst
Airlines are looking better today. Why? At roughly $70 per barrel, oil prices are about back where they were in January after a first-half rally. Cost-cutting carriers such as Delta Air Lines and the soon-to-be-combined UAL Corp.
And yet the good times won’t last. Oil will rally again, and airlines are still cutting to grow. They’re cutting capacity -- read: fewer flights, fewer seats -- in order to raise prices, hoping that higher margins on fewer seats (and fewer costs) will deliver a more vibrant profit picture. Trouble is, all this assumes that competitors won’t do anything to unbalance this fragile equation. A fare war, for example.
Until the airlines begin paying large, regular, and uninterrupted dividends, I’m not buying. And I don’t think you should be, either.
Matt Koppenheffer, Fool contributor
It's pretty, it makes nice jewelry, and some folks even think it's good for your health. That's right, I'm talking about gold. And I'm going to go ahead and suggest avoiding all of the gold producers.
OK, not actually all of them -- mining giants BHP Billiton, Vale
Though many investors are swearing by gold right now, I'm skeptical at best. Right now the price of gold seems to be driven by a lot of speculation rather than the "fundamental factors" that proponents like to claim. Meanwhile, at best, the gold producers have historically managed very mediocre returns on equity . And good luck finding a halfway-decent dividend yield from any of these gold hunters.
Go ahead and buy gold jewelry if you think it looks nice, but when it comes to investments, look elsewhere.
