When a good stock is not a good buy
Sometimes there are stocks that appear to do everything right, says this U.S. advisory, but they’re just not quite good enough to buy.
When you’re searching for profits in today’s imperfect market, you can never be too careful.
There are good stocks out there that don’t belong in your portfolio.
There are companies that have lots going for them, but don’t quite make the grade. You can, and should, make a better choice.
That’s the opinion of a top U.S. advisory that has been measuring the stocks on the S&P 500 Index for many years.
There are well-known stocks with solid fundamentals and a history of strong performance that nonetheless get a “close but no cigar” call from Dow Theory Forecasts.
This seasoned Wall Street advisory has compiled a list of 12 such stocks, several of which are household names. Each breeds just enough doubt to keep it off the buy list.
It would be instructive to come across a similar list of Canadian equities. In the meantime, let’s see what we can learn from this advisory’s discarded dozen.
Explosive potential
Before we get to the not-quite-winners, it’s only fair to offer up at least one winner. We’ll take the advisory’s featured pick, its “Analysts’ Choice” selection, NII Holdings (NASDQ-NIHD).
NII, says the advisory, “offers explosive growth potential by tapping into the underpenetrated Latin American wireless market.” There are still plenty of customers waiting for cellphones, Internet access and other wireless services in Central and South America.
The company’s biggest sales are in Mexico and Brazil, with Argentina and Peru also in the mix. The shares have risen 50 per cent in the past year, yet the stock still trades at a fairly modest 16 times trailing earnings.
This stock can be volatile, warns the advisory, and it pays no dividend. But it delivers “high-quality profits.” It is trading today at $31.36.
Near-misses
Dow Theory Forecasts likes to spread its “buys” around, with a solid group of stocks in every sector. But there’s a limit.
For instance, in 2007 and 2008, when energy stocks were going from strength to strength, the advisory had little trouble finding stocks that met most of their fundamental criteria. Yet not all of them made the list.
“Do we really want to recommend five oil majors, even if they’re all good investments? Sometimes we just have to choose our favorites.”
There is a way of paring the list. “There are always near-misses, stocks that look good on paper but don’t quite make the cut.”
So let’s see why 12 good stocks were left out. “All are quality companies but lack that special something needed to make the Buy List.”
Ripe for a pullback
The dozen dropouts begin with two famous technology stocks.
Apple (NASQ-AAPL) has more than doubled its price since March. But it’s very expensive and “ripe for a pullback,” says the advisory. It trades at $197 and pays no dividend.
Google (NASDQ-GOOG) is doing even better. Still, competition is stiffening “yet the stock is still priced as if it will dominate the industry for a decade.” That price is $593. There are no dividends.
AutoZone (NYSE-AZO), the auto parts dealer, has a big debt load, and “profit expectations may prove too aggressive.” It’s pretty rich, too, at $154.92, and is not a dividend payer.
Chubb (NYSE-CB) is well known for making burglar alarms, but the alarm for the stock is slipping cash flow and lower sales in recent quarters. It trades at $48 and yields 2.8 per cent on its dividend of $1.40.
Diamond Offshore (NYSE-DD) is a perfectly good offshore drilling outfit. The advisory just likes three others more — Transocean (NYSE-RIG), National Oilwell Varco (NYSE-NOV) and Oceaneering (NYSE-OII). Diamond is at $96 and yields 0.5 per cent on a $0.50 dividend.
Gap (NYSE-GPS) has a world-famous name, but the advisory isn’t crazy about retail today. “High profit expectations invite disappointment.” It trades at $21 and yields 1.5 per cent on its dividend of $0.34.
Kimberly-Clark (NYSE-KMB) and Kleenex have been famous a lot longer than Gap. But its growth stems from cost cuts, not sales. Estimates project “a sudden return to sales growth” which may not happen. The stock is $64.40 and it yields a healthy 3.6 per cent on a dividend of $2.40.
Deadly side effects
We’ll conclude with health care stocks — there are no less than five on the list. Elsewhere in this issue, the advisory deals with health care stocks that should benefit from the new legislation making its way through Congress. These five won’t benefit quite enough.
Amgen (NASDQ-AMGN) “depends heavily on a small number of drugs, including two blockbusters with safety concerns.” The drug pipeline is thin. It trades at $56.53 and pays no dividend.
Biogen Idec (NASDQ-BIIB) is worrisome due to “deadly side affects” from its biggest product (drugs for multiple sclerosis). It, too, has a questionable drug pipeline. It trades at $48.40 and pays no dividend.
Bristol-Myers Squibb (NYSE-BMY) faces stiff competition from generic drugs over the next four years. “Cash-flow trends are weak.” The stock is at $25.34 and does yield 4.9 per cent on a dividend of $1.24.
Humana (NYSE-HUM), which supplies health insurance and benefits, “looks good by the numbers” but there’s a lot of uncertainty in the industry. It trades at $41.86, with no dividend.
Intuitive Surgical (NASDQ-ISRG), the surgical robotics specialist, is “an impressive grower,” but its valuations — triple the industry average — scare the advisory. It trades at a rich $291.30 and there’s no dividend.
It’s an apt message at any time, this advisory suggests, but it’s especially true in today’s markets. Just being good isn’t quite good enough. Only the best will do for your portfolio.
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