I got called out.
In a column back in July, I listed five terrible stocks that Wall Street rated as "buys." These companies had loads of debt and trailing losses and were trading near 52-week highs. Here's what that list looked like.
|
Company |
Description |
% of 52-Week High |
Debt/Capital |
Net Income (TTM)* |
Analyst Recommendation |
|---|---|---|---|---|---|
|
Virgin Media |
Cable and communications in the U.K. | 95% | 82% | ($553 million) | Buy |
|
Sun Communities |
Manufactured homes | 88% | 110% | ($6 million) | Buy |
|
Vonage |
Telecom over the Internet | 87% | 138% | ($34 million) | Buy |
|
Las Vegas Sands |
Casinos in Las Vegas and Macau | 87% | 59% | ($302 million) | Buy |
| US Airways (NYSE: LCC) | Airline | 84% | 111% | ($147 million) | Buy |
Source: Capital IQ, a division of Standard & Poor's. Based on figures as of July 16. *Trailing 12 months.
Seems simple enough that these companies should be avoided, right? That's exactly what I argued. Here's the problem. Motley Fool community member dragonLZ decided to look back and calculate the returns of these five companies since I pooh-poohed them. The result? As a group, they're all crushing the market. And not by a little, either. Las Vegas Sands has almost doubled! Check out these returns.
|
Company |
Return since July 16 |
|---|---|
| Virgin Media | 41.1% |
| Sun Communities | 20.5% |
| Vonage | 3.3% |
| Las Vegas Sands | 95.7% |
| US Airways | 28% |
| Average | 37.7% |
| S&P 500 | 8% |
Source: Google Finance.
Even worse, I suggested that readers look into three companies with better fundamentals: graphics chipmaker NVIDIA
|
Company |
Return since July 16 |
|---|---|
| NVIDIA | 12.3% |
| Monsanto | 5.1% |
| Walgreen | 14.6% |
| Average | 10.7% |
| S&P 500 | 8% |
Source: Google Finance.
If you're following along, you see that both groups are beating the market; however, the "terrible" companies are trouncing my group of higher-quality companies.
But I've got one more shocker for you. Even with my group's returns trailing by more than 20 percentage points, I stand by my call and think I'll be ahead over the next five years.
Why?
Let's remember that I made my call less than four months ago. Time works solidly against bad companies. And make no mistake, these five companies are bad.
- Virgin Media: I'll make my case with two figures. Number of years since 1995: 15. Number of profitable years by Virgin Media since 1995: 1.
- Sun Communities: This company is a REIT (real estate investment trust) that develops manufactured housing communities. Kind of a red flag when it reports losses throughout the height of the housing bubble.
- Vonage: Vonage is to voice-over IP what NetZero is to Internet access -- increasingly irrelevant.
- Las Vegas Sands: I have no confidence this casino will ever stop loading up on debt and growing for growth's sake.
- US Airways: Basic rule of investing -- with a rare exception, airline stocks crash and burn.
In an up market like we've had recently (e.g., the returns for September were the highest for that month since 1939), the imperfections of these terrible companies are masked. But at some point, we'll experience difficulties. And when the tide ebbs, it'll be companies like these five that will be standing naked.
A better option
I have nothing against trash-bin-diving, but sometimes what you get is just garbage. So I'll stick with NVIDIA, Monsanto, and Walgreen over these five terrible stocks.
For five more stocks picked by five Motley Fool analysts, click here to get our free report: 5 Stocks The Motley Fool Owns -- And You Should Too. I'll vouch for the last of the five stocks because it was my pick.
