As investors, we spend much of our time looking for stock market winners, not losers (unless we're in the risky business of shorting stocks). There are no real "sure things" in investing, though, and sometimes you buy a promising-looking stock only to have it turn out to be a dud.
But then there are other companies that might as well flash warning signs saying, "Don't buy!" For me, they include Tronox (NYSE:TROX), General Electric (NYSE:GE), and Ferrellgas Partners LP (NYSE:FGP). I'd hate to buy any of them right now...and I say that even though I own shares in one of them! Here's why you may want to avoid them as well.
Tough stock in a tough industry
The market for titanium dioxide (TiO2) has been on fire for the past two years. TiO2 is a versatile substance that is found in everything from sunscreen to animal feed. But its most important use is as the primary white pigment in paint. So TiO2 manufacturers benefit from improving construction, real estate, and automotive markets, where white paint is a staple. As a result, most TiO2 stocks saw big gains in 2016 and 2017 as those markets improved.
But a market that goes up can come down, and the TiO2 market has been a cyclical one for years. Worse, during the last market downturn in 2014, many TiO2 companies had to go deep into debt to fund their operations. And major TiO2 manufacturer Tronox is in worse shape than most of its peers.
None of the big TiO2 companies have good balance sheets, but Tronox's is in the worst shape of the lot, with a debt-to-equity ratio of 1.2. By comparison, its chief rival Chemours, which was loaded up with debt before being spun off by parent DuPont, only has a debt-to-equity ratio of 0.5. Other TiO2 companies' ratios are even lower.
And what did all that debt get Tronox? Its share price -- even after a tremendous run-up in 2016 and 2017 -- is still 2% lower than it was five years ago. And that's with a price-to-earnings ratio of 51.5 compared to Chemours' 12.4, with other TiO2 companies' again even lower.
Tons of debt, an inflated valuation, and a share price that isn't even out of the hole after major market gains? No. Thank. You.
If I didn't own it
Unfortunately, I already own shares of the next company on the list, General Electric. But if I didn't, I sure wouldn't buy in now.
GE has been on the rocks for years, thanks to some poorly timed investments in the oil and gas sector at its peak, and some underperforming core business units like transportation. Plus, because of the conglomerate's size, even the outperforming parts of its business -- particularly jet engines -- were being offset by the laggards, providing no real benefit to shareholders.
But it looked as though GE was poised to move past those issues by merging its oil and gas unit with oil services provider Baker Hughes to form Baker Hughes, a GE Company (NYSE:BHGE), spinning or selling off its financial businesses, and getting a new CEO in John Flannery. I thought the market would give Flannery the benefit of the doubt and halt the stock's prolonged slide.
Instead, the slide accelerated. Since Flannery took the reins, a whole host of issues have emerged for the company, including a steep dividend cut, an unforeseen insurance charge, and painful lowering of earnings projections.
While the stock may seem cheap at just above $14 per share, the road to recovery -- if it even exists -- will be a long one. Investors are probably better off putting their money in less-risky prospects that have clearer avenues for growth. Plus, the steady stream of bad news is just likely to give you heartburn. That adds up to a hard pass.
Another ill-timed investment
GE isn't the only company to recently make a poor investment in energy, of course. In a similar move, tiny Ferrellgas Partners, a propane distributor master limited partnership (MLP), tried to break into the midstream (storage and transportation) gas market starting in 2014.
It wasn't necessarily a bad strategy: The MLP structure is traditionally well-suited to midstream investment, and the company was able to grow its midstream business by taking on debt. But when a key customer left in 2016, the company took a huge hit. Its debt had jumped by 75% to $1.9 billion, and it soon had to take a writedown of $650 million on the value of its midstream operations.
The company's still trying to dig out from under its mountain of debt, but without the cash flow it was projecting from its midstream investments, it hasn't made much progress. Meanwhile, it's selling off its midstream assets -- at a hefty loss -- to fund its operations. For example, Ferrellgas just sold a group of tank rail cars for $47 million and took a $35 million non-cash loss on the sale.
Sure, Ferrellgas's current 10% dividend yield may look tempting, but there are plenty of other MLPs with similar yields in much better shape. Don't let the next ill-timed investment be yours.
What not to buy
It can be tempting to buy a stock that's been on the rise, like Tronox's, or beaten-down shares like GE's, or a big dividend payer like Ferrellgas, but I'd hate to purchase any of them right now. Instead, I'd prefer to buy solid dividend stocks that seem undervalued or companies with excellent growth prospects.
Because there are some stocks that just aren't worth your money or your time.