It seems obvious to say the key to beating the market is finding great stocks to buy and hold over the long term. But equally important to achieving that goal -- and arguably just as difficult -- is knowing which stocks to avoid along the way.
We asked three of our contributors to pick one stock they would avoid at all costs. Here's why they chose mobile games specialist Zynga (NASDAQ:ZNGA), coal giant Cliffs Natural Resources (NYSE:CLF), and clinical stage biotech Northwest Biotherapeutics (NASDAQ:NWBO).
Steve Symington (Zynga): I've never disguised my distaste for the typically poor financial performance of content providers for free-to-play games. After all, game makers in the space typically must churn out one hit after the other to sustain early rates of torrid growth -- an exceedingly difficult task given a relative lack of loyalty and attention granted to them by their target gaming audience. But if I had to pick one company to avoid at all costs, it would be Zynga (NASDAQ:ZNGA).
Perhaps best known for its FarmVille and Words With Friends titles, Zynga stock has plunged more than 70% since its IPO in late 2011, hurt by a combination of an executive and engineering talent exodus, copycat games, its unsuccessful acquisition of OMGPOP, and a revised contract with Facebook -- which formerly comprised more than 90% of Zynga's revenue -- in 2012.
This past April, however, Zynga's much-maligned co-founder Mark Pincus returned as the company's CEO after Don Mattrick -- who was hired as Pincus' replacement in 2013 -- stepped down from the post. Pincus has revealed plans to revitalize the company, including refocusing on the opportunity in "busy mass-market adults," placing a greater emphasis on data analytics to drive design decisions, and strive to creatively innovate new categories of games.
Also to its credit, Zynga's most recent quarter was punctuated by net income of roughly $3 million, or breakeven on a per-share basis, and 10.8% growth in revenue to $195.7 million. And though bookings were roughly flat from the same year-ago period at $176 million, that exceeded Zynga's own expectations.
At the same time, however, the size of Zynga's player base continued to decline. Average daily active users fell 21% year over year to 19 million, while monthly active users dropped 27% year over year to 75 million. In conjunction with the report, Zynga also announced the immediate resignation of CFO David Lee without providing a reason for his departure. As it stands, it remains unclear whether Zynga's next round of game releases will be able to stem this decline. And until Zynga shows proof its efforts will bear fruit on this crucial measure of success, I have no problem continuing to avoid the stock.
In addition, the company isn't exactly on sound financial footing, as it only had $19 million in cash on its balance sheet as of June 30, despite the fact that it lost more than than $38 million last quarter from operations alone. While the company did just raise an additional $30 million in October to keep the doors open, I doubt that will be anywhere near enough to sustain the company for long given the huge expenses of running its late-stage clinical trials. This makes it all the more likely that the company will once again be looking to tap the markets to keep it alive.
I'll fully admit (and hope!) that everything could work out find for DCVax-L, but given the long-term track record of this stock and its less than ideal financial situation, this is one stock that I'm content to keep far away from.
Brian Feroldi has no position in any stocks mentioned. Jason Hall has no position in any stocks mentioned. Steve Symington has no position in any stocks mentioned. The Motley Fool owns shares of Cliffs Natural Resources. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.