Don’t Buy Big Losers on Speculation

by Louis Navellier | July 23, 2013 2:08 pm

One of the most exciting things for an investor is owning a stock that has consistently improving fundamentals and stages a continual climb to fantastic profits.

On the flip side, one of the scariest things you can do as an investor is buy a stock that has made a huge move without simultaneous fundamental improvement. These stocks are usually the subject of speculation regarding a business turnaround, takeover or some fantastic new product that will lead to huge profits. If the rumors prove untrue, the stocks can collapse and never recover.

Investors are best off avoiding these rank speculations and focusing on those where solid fundamentals are a fact and not a hope. Portfolio Grader[1] can help with that, because it cuts straight through the hype and rumors, reflect only the stock’s performance. If the rumors eventually prove true, Portfolio Grader will note the improvements and you’ll have plenty of time to buy the shares.

One stock that is up on apparent speculation is Groupon (GRPN[2]). The online coupon company has seen its shares gain 83% so far this year on hopes of a turnaround. But the company’s revenues are declining, and Groupon has not been as successful at expanding into international markets as investors originally hoped.

The company has posted one gigantic negative earnings surprise in the past six months and I would not be surprised to see another one this quarter. The cost of using the service has made merchants reluctant to use Groupon except as a last resort to gain revenues. Portfolio Grader gives the stock a “D” and the shares remain a “sell” until we see some signs of improving fundamentals.

Caesars Entertainment (CZR[3]) is another stock where the fundamentals do not appear to justify the rise in the stock price. The stock is up more than 100% this year as investors are betting that the announced spin off of some of the better properties in the gaming portfolio will be successful. That remains to be seen, but the parent company is over levered and there is a real fear of bankruptcy for CZR after the spinoff.

Most investors would be better served by avoiding this stock until after the spin-off is completed and seeing how the new company performs fundamentally as a stand-alone entity. The company has more than $20 billion in debt and is struggling to make the interest payments. Portfolio Grader currently has the stock as “C” ranking, and while the stock remains a “hold,” most investors can find better stocks for their money than CZR after the huge price move.

Finding huge winners is a lot of fun and very profitable. But avoiding big losers is just as important, as it can help you protect those profits and avoid a lot of tears.

Louis Navellier is the editor of Blue Chip Growth[4].

  1. Portfolio Grader:
  2. GRPN:
  3. CZR:
  4. Blue Chip Growth:

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