Quick! What is Warren Buffett’s first rule of investing? That’s right, it’s “Never lose money.” Buffett is all about investing in situations where his risk is low. Investing is hard enough as it is, and Buffett doesn’t want to expose himself unnecessarily to additional risk.

Plus, losses can ruin your returns. Investors in Sirius Satellite Radio (NASDAQ:SIRI) and Wachovia (NYSE:WB) know what I’m talking about.

How can I avoid such losses?
One good way is to consult The Motley Fool’s CAPS stock-rating database before you buy a company. In CAPS, more than 110,000 people rank companies, which are then given a rating of one to five stars. Motley Fool data shows that the one- and two-star stocks have underperformed the market, so if the stock you are interested in shows up on that list, you may want to think twice.

To get you started with a few names to avoid, I punched a few criteria into the CAPS screening tool. I was looking for 1) expensive stocks, and 2) stocks with low CAPS ratings.

I used the following criteria:

  • One- or two-star CAPS rating.
  • At least 50 underperform ratings in CAPS.
  • P/E ratio higher than 40.
  • Price-to-sales ratio greater than 6.
  • Less than 20% below its 12-month high.

The search returned the following:

Company Name

CAPS Rating

Percent Below 12-Mo. High

P/E (TTM)

Price-to-Sales (TTM)

Capitol Federal (NASDAQ:CFFN)

*

4.7

85.8

6.8

First Solar (NASDAQ:FSLR)

**

17.2

104.2

33.0

Rangold Resources (NASDAQ:GOLD)

**

13.7

75.9

12.1

Red Hat (NYSE:RHT)

**

15.2

56.9

7.2

Salesforce.com (NYSE:CRM)

*

15.2

289.8

9.2

Source: Motley Fool CAPS, as of July 25, 2008. TTM = trailing 12 months.

I’ll let you judge the worthiness of these potential investments. Personally, I’d rather own cheap stocks with five-star ratings like these, rather than the expensive stocks with one- or two-star ratings listed above. What about you? Visit us at Motley Fool CAPS to voice your opinion on more than 5,500 companies.

Fool analyst Andrew Sullivan likes blue chips (both the stock kind and the potato kind) but does not have a financial position in any of the stocks mentioned in this article. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.