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3 Investments I Won't Be Buying in 2014

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If I remember 2013 as anything, it'll be the year of the endless rally. With the exception of commodities and the utility sector, chances are you've had quite a few significant gainers in your portfolio. Considering that the stock market has averaged historical gains of 8%-10% over the past decade, depending on the index, this year's 27% gain in the S&P 500 (SNPINDEX: ^GSPC  ) has been one impressive gain that you've missed out on if you haven't been in stocks for the long-term.

I'll be the first to admit that I'm extremely skeptical of the market heading even higher following its meteoric rise from the recession, but I'm also not going to sell any of my holdings in anticipation of a sell-off, either. What I can tell you is there are three investments I certainly won't be purchasing in 2014.

Source: Images Money, Flickr.

Chinese small-cap stocks
I would definitely like to believe that the quality of recordkeeping oversight has improved since the dozen or so Chinese-small caps that melted down in 2010 and 2011, but I'm still not convinced. Part of that can be blamed on the fact that I was burned by one of those dozen Chinese small-caps, Jiangbo Pharmaceuticals, which last traded in July on the pink sheets for about $0.025. But a majority of my concern rests with a number of enormous gains in low-volume Chinese small caps which certainly don't have the bottom-line catalysts to support their enormous gains.

Take Daqo New Energy (NYSE: DQ  ) , a supplier of polysilicon and wafers to the solar industry in China. As you might expect, polysilicon prices have been falling for years, and China's solar industry has struggled to turn a profit as an oversupply glut dragged down solar panel prices and select overseas markets instituted antidumping tariffs to make domestic solar products more competitive. If not for China's own government pledging to bring 35 GW of solar power online by 2015, some of its large domestic solar manufacturers would have run the risk of going out of business.

What this has done is create a monstrous wall of worry for Daqo shareholders, as well as ongoing losses. For the recently reported third-quarter, despite exceeding its polysilicon shipment guidance, Daqo still recorded a $10.3 million net loss, or $1.49 per share. Year-to-date Daqo has lost $212.8 million in the past three quarters alone, and has burned through $324 million in free cash over the previous two fiscal years. Despite this, the stock is up 381% year-to-date. 

A word of advice for 2014: Just because it's located in China or has "China" in its name doesn't mean it's going to be a profitable or attractive investment!

This wasn't exactly a banner year for homebuilders compared to 2012, but they've nonetheless seen impressive growth in their top and bottom-lines thanks to rapidly growing home prices -- the Case-Shiller 20-City Index increased 13.3% in its latest reading -- and well-controlled inventory by a number of large builders. Ultimately, it's a simple matter of product scarcity: keeping inventory low should help drive buyer urgency and boost prices.

However, the homebuilding sector has been teetering in dangerous territory lately, with lending rates jumping modestly from their May lows and mortgage loan originations plummeting 60% over that timeframe. In other words, the way I see it is that U.S. consumers have been so spoiled by historically low lending rates that they don't recognize a screaming value (i.e., 4.25% 30-year mortgage rates) when it's right in their faces!

The proof is in the pudding recently, with PulteGroup (NYSE: PHM  ) reporting a 17% drop in net new home orders in the third-quarter, which overshadowed an otherwise fantastic report that saw home sale revenue increase by 21%.  A similar picture was painted by America's largest homebuilder D.R. Horton (NYSE: DHI  ) , which reported a 2% decline in net new sales orders for the fourth quarter despite a 14% increase in the value of those remaining orders due to higher home values. 

We're being given all the early stage warning signs that the homebuilding rally could be over. Until consumers cooperate with already low lending rates, I just don't see how this sector powers higher in 2014.

I can tell you one surefire way to keep me away from an investment -- have it not be real!

Every day I check bitcoin quotes just for the heck of it, and every day I see they've motored even higher, driven by speculation and purposeful scarcity. With a thinly traded platform rife with day-traders and speculators, you have what could be the next bubble ready to burst.

My biggest gripe with the Internet currency bitcoin is that it doesn't physically exist! You can't order a bitcoin, put it in your wallet, take it down to your local grocery store and buy yourself food -- it doesn't work that way. In fact, there are only a select number of retailers and a few other institutions that will actually accept the mystical currency in the first place, really limiting your usable options.

Furthermore, no government recognizes bitcoins as an acceptable currency, so there's absolutely no comparison that can be made or real-world catalysts that should ultimately drive the underlying price. In other words, there are zero catalysts, and I certainly won't be putting my money to work in something with no fundamental catalysts.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 03, 2013, at 12:36 PM, prginww wrote:

    Hey Sean,

    Agreed and been there with you on a small amount of a small Chinese pharma company. It was an experiment which blew up as well, and I won't be going there again.

    Homes as well - I think the dynamics of the previous housing crisis have not all been worked out, and home builders are at the heart of that. Unless median home prices come down still a considerable amount and remain firmly at 3x median income and STAY there, I think the get-rich on real estate mentality is still locked in and problematic for the whole sector.

    I imagine that bitcoins are for those tin-foil-hat wearing, conspiracy-theory toting, bunker dwelling nut jobs who growl about the Federal Reserve. That said, how much of the cash in your saving/checking account have you ever seen? How many of the stocks in your investment account have you ever seen? What moves the payments and charges in your credit card accounts?


    How different is our current system from the idea of Bitcoins?

    Practically, we are not far from trusting such as system.

    That said, I'd stay far far away from Bitcoins. Some pretty rabid folks in that there neck o' the woods...


  • Report this Comment On December 03, 2013, at 4:53 PM, prginww wrote:

    I was sceptical about bitcoin until this year. Unfortunately. At the end of the day it boils down to that I trust the market more than any government on earth. Most currencies are devalued so governments can play their socialism game.

    I think it is good of there are options to opt out of these currencies. Competition is always good for the consumer!

    We need more bitcoins, litecoins etc. and less state controlled rubels, no matter if they are called USD, EUR or whatever.

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