I've got it on good authority that there are people who actually search through the trash bins behind grocery stores, in hopes of finding food that might still be edible.
Gross, right?
So why are you doing the same thing in your portfolio?
What's that rotten stink?
Last year's rising market tide floated all boats. Even AIG, 80% owned by the government and absolutely emblematic of all that has gone wrong in recent years, was bid up a couple of hundred percent last summer!
And it's not the only one. The stocks of many beleaguered, struggling, debt-laden, second-string companies have soared for no good reason, beyond the possibility that some investors think there might be money to be made from sifting through the market's trash bin.
Just take a look at this garbage:
|
Company |
Price Appreciation (12 months) |
Earnings/Loss Per Share LTM |
Revenue Increase/Decrease (LTM) |
Total Debt-to-Capital Ratio |
|---|---|---|---|---|
|
Carmike Cinemas |
170.6% |
($4.44) |
5.3% |
98.9 |
|
OMNOVA |
917.5% |
$0.38 |
(14%) |
99.7 |
|
Valassis Communications |
1,543.3% |
($3.68) |
(6.3%) |
94.4 |
|
GenCorp |
110% |
$0.75 |
0.8% |
98.9 |
|
Park-Ohio Holdings |
123.2% |
($11.51) |
(28.5%) |
96.3 |
*All data from Capital IQ, a unit of Standard & Poor's, and MSN Money, as of Jan. 21.
Those are heady gains for such a sad-sack bunch of stocks. Only two have turned a profit in the last 12 months, and the other signs they've given off -- like decreasing revenue and formidable amounts of debt -- should give investors pause.
Add a harsh consumer spending environment to our economy's plentiful difficulties, and my advice to investors is to leave speculative garbage alone … lest it poison your portfolio.
Don't get stuck holding the garbage bag
In other words, investors are choosing to spin the metaphorical wheel on beleaguered garbage stocks, even though these odorous equities may not even make it out of the current economic environment alive.
Sure, a quick double would be nice, but it's all too likely that the investors who hope such stocks will rise won't know enough to get out before their shares start to inevitably fall again.
Instead of rummaging through the garbage, find stocks connected to high-quality, unspoiled companies that aren't likely to leave investors holding a bag of fetid losses.
At Motley Fool Stock Advisor, we look for strong, well-run companies that have bright futures and strong balance sheets. Our picks include high-quality, cash-rich names such as Costco
If you're having a hard time separating the fresh ideas from the trashy ones, just click here for a free, 30-day trial to Stock Advisor. There's no obligation to subscribe.
This article was first published on Sept. 8, 2009. It has been updated.
Costco and NVIDIA are Motley Fool Stock Advisor recommendations. Costco Wholesale is a Motley Fool Inside Value recommendation. The Fool owns shares of Costco Wholesale.
Alyce Lomax does not own shares of any of the companies mentioned. The Fool has a disclosure policy.
