April 9, 2009 |
Today, we thought we'd take the flip side of that coin and examine five stocks that are anything but incredible.
Why they are so dangerous
What first caught our eye about these five dogs is that they are five of the six most heavily traded stocks on our major exchanges:
exchanges:
| Company | Average Daily Trading Volume, Last 3 Months | Recent Share Price |
|---|---|---|
| Citigroup (NYSE: C) | 48.1 million | $2.85 |
| Bank of America (NYSE: BAC) | 43.7 million | $7.60 |
| Ford (NYSE: F) | 40.8 million | $3.25 |
| General Electric (NYSE: GE) | 29.7 million | $10.94 |
| Fannie Mae (NYSE: FNM) | 29.4 million | $0.70 |
| General Motors (NYSE: GM) | 27.2 million | $2.10 |
Source: Capital IQ, a division of Standard & Poor's.
Millions upon millions of these shares have traded hands -- on a daily basis -- over the past three months. That might make sense; after all, every one of these stocks has headlined the nightly news at least once during that time period.
Now, we have to acknowledge that many of these transactions were from the big-money institutions or the short-term day-trading crowd. But somewhere in there is the little guy.
And you should stay away
Of the six most heavily traded stocks, we believe you should avoid five of them outright:
- Citigroup
- Bank of America
- Ford
- Fannie Mae
- General Motors
Why? Because these five stocks have three troubling commonalities:
1. Convoluted relationship with the government.
According to the Center for Responsive Politics, the "Finance, Insurance, and Real Estate" industry spent more than $3.4 billion on lobbyists between 1998 and 2008 -- more than any other industry. Over that same time span, General Motors and Ford "donated" nearly $200 million to Washington.
What did those five companies get for all of those political contributions? All but Ford have received well-publicized bailout funds. And while the taxpayer money will be used to save these companies from a far worse fate (we hope), Uncle Sam's money comes with strings attached.
Under normal circumstances, businesses are accountable to three constituencies: their customers, shareholders, and employees. Businesses will do well when they do right by all of them. These five companies, however, are now accountable to a supra-constituency: the federal government. That frightens us, because it's unclear how customers, shareholders, and employees will fare when these companies try to do right by the feds.
2. Gordian knot-like financials.
Take a look at Citigroup's balance sheet. For all of the information, for all of the numbers, it's among the most confusing documents we've ever examined. Call us when you figure out what it owns and what it owes. Heck, call Citi CEO Vikram Pandit first. He may benefit from the knowledge.
See, it's seemed to us that as the credit crisis persists, insiders haven't been totally clear about what's on their books. Though some have a vague sense that mark-to-market accounting has forced them to write down asset values too far, only time will tell ... and time may not be on these firms' sides right now.
The auto companies have some of these same issues -- they have consumer finance/lending divisions -- but their pension obligations present an entirely different yet similarly complicated set of problems.
3. No near-term catalysts.
The financial companies will survive in some form -- our government has committed to that. But their future will be unlike their past. Regulation will be stricter. The massive 30-plus-times leverage that drove outperformance earlier this decade will be a dark relic of a bygone era. And now, skeptical investors may never ascribe the same market multiple to profits.
We just can't see a world in which these companies post the same kind of profits that we saw for the past 10 to 15 years.
But wait, I count six ...
GE is the sixth company on that list, and it faces some of the same issues mentioned above. In fact, GE lost its AAA credit rating earlier this month for the first time in 40 years.
Yet we're hesitant to write GE off, because GE is a massive conglomerate that owns a collection of diverse and cash-generating operating businesses. As a result, its balance sheet is in better shape than some others, and its recent deal with Berkshire Hathaway shows that the company can tap resources that smaller, more troubled names cannot.
So we're taking a wait-and-see attitude here. That may not be a satisfying answer for anyone looking to buy GE, but remember Warren Buffett's observation that there are no "called strikes" in investing.
What you shouldn't avoid right now
Contrast the future of Citigroup or General Motors with, say, the future of Apple (Nasdaq: AAPL). Apple was recently named the "World's Most Admired Company" by Fortune. It hasn't received any TARP money from the government; even better, as of the end of 2008, Apple had more than $25 billion in cash and short-term investments ... with zero debt.
That means the company has a bulletproof financial position and can continue with business as usual -- snazzy marketing and innovating new products -- while competitors are spending their time figuring out ways just to survive.
This isn't to say that Apple doesn't face challenges. It's tricky to be in a business where you need to keep pace with rapid development cycles. But at least Apple isn't encumbered by convoluted relationships with the government and convoluted financials.
Buy one-foot bars
There's value in a company like GE. Heck, there may even be value in one or all five of the stocks we've advised you to avoid. But given their complexity, they're the proverbial "seven-foot bars" that Warren Buffett says he avoids in investing. (Remember, Berkshire got a 10% dividend on those preferred shares it bought from GE -- shares that are far more interesting to us than the common stock.)
Instead, Buffett looks for "one-foot bars that I can step over." In other words, lay-ups, short putts, or fastballs down the middle (to diversify our sports analogy). These are easy investments where the reward profile far outweighs the risk profile.
Fool co-founder David Gardner believes Apple represents just such an opportunity today, and he and his brother Tom have found all sorts of similar opportunities for their Motley Fool Stock Advisor subscribers. That, after all, is the silver lining of a down market, and if you're prepared to be a long-term investor, you can take advantage.
Click here to join Stock Advisor free for 30 days and enjoy immediate access to all of David and Tom's proprietary research. There is no obligation to subscribe.
Brian Richards does not own shares of any companies mentioned. Tim Hanson owns shares of Berkshire Hathaway. Apple and Berkshire Hathaway are Motley Fool Stock Advisor recommendations. Berkshire is also an Inside Value pick and Motley Fool holding. The Motley Fool has a disclosure policy.
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