Buying stocks is easy. Just a few clicks of your mouse and it's over. Choosing which stocks to buy is a different matter. With thousands of companies to choose from, the temptation to go with stocks that have a good story becomes irresistible to many investors.
Perhaps the best way to begin, however, is to decide what you don't want to invest in -- to whittle down the vast universe of stocks to a more manageable size by first eliminating companies you just won't touch. Facebook (NASDAQ:FB), J.C. Penney (NYSE:JCP), and Qudian (NYSE:QD) are three stocks I've crossed off my list. Here's why I'd hate to buy these businesses today:
For years, Facebook has benefited from astronomical user growth, but more recently has run into trouble because of policies that control what users are able to see and that undermine their privacy. It added only 22 million users worldwide last quarter, its smallest increase since 2011, when such data first became available.
But it's not just the number of users Facebook is attracting that is the problem. Although still a dominant online advertising force, it is losing ad market share to Amazon.com, its video platform Watch has yet to attract any kind of audience, and its Stories feature hasn't been used on its flagship platform like it has with its other property, Instagram, and Snap, from which it stole the idea.
It is investing a lot of money in the service, causing it to forecast lower revenue growth, but it's not getting much payoff -- all the while coming under greater scrutiny from politicians here at home and from regulators abroad.
Facebook's stock has lost 20% of its value since reporting earnings, and until it can prove it can pull some growth levers once more, this is a stock I plan to stay away from.
Former J.C. Penney CEO Ron Johnson moved too fast when making changes at the stumbling old-line retailer, as he tried to drag it into the 21st century. His successor Marvin Ellison moved too slowly. Management kept struggling stores for far too long, and let the locations drain profits and crimp the company's recovery.
Ellison was something of a stabilizing force at J.C. Penney. But he lacked experience in apparel retailing, the skill set essential to attracting the department store chain's primary customer. Penney is undergoing an executive search to replace Ellison after he jumped to Lowe's, an environment he's much more comfortable with, and the company says apparel experience is guiding the company's search.
A new executive may make the whole more cohesive, but the core middle-aged mom whom it wants to target may have already abandoned the retailer. Where J.C. Penney is struggling to show positive same-store sales, rivals Kohl's and Macy's are chugging along.
There are too many questions facing J.C. Penney at the moment to make an investment here anything more than a gamble on the fact that this time, management will get it right.
It's been almost a year since its IPO, and Chinese online payday lender Qudian has seen its stock lose over three quarters of its value. Although its story looked good at the outset, the reality has been anything but, as regulators have cracked down on the type of business it operates.
A growing Chinese economy has seen wages rising, along with an increased consumerist mentality. But youthful desires for acquiring things don't match up with the requisite credit profile needed to qualify for a loan. Enter payday lenders like Qudian, which, when it went public, was lending an average $136 in cash loans and typically seeing them paid back in two months.
However, last December the Chinese government issued new regulations on such activities, and the impact was swift. Qudian says the number of transactions fell 8% in the first quarter while the number of borrowers tumbled over 13%. Credit drawdowns plunged 44%.
Although Qudian says it "proactively and swiftly de-risked from an industrywide credit downturn" that resulted from the new regulations, the damage has been done. The stock is down 83% from the highs it hit right after its IPO, and there seems little chance it will recover anytime in the future, near or otherwise.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon and Facebook. The Motley Fool recommends Lowe's. The Motley Fool has a disclosure policy.