There are two fundamental rules to successful investing:
- Buy good stocks
- Avoid bad stocks
If you have those two rules sorted out, you will do well.
Regarding, Rule No. 2, there’s an important adage to keep in mind: Never try to catch a falling knife. That means don’t buy stocks that are falling, in an attempt to catch them right at the bottom. It’s in that vein that we urge your to avoid these seven falling knives.
These stocks have a lot going for them — a lot going wrong, that is. They are the standard bearers for some of the most benighted sectors you can find today.
It would be easy to solely beat up on energy companies but most savvy investors know to stay away from them; that’s why we’ve included stocks from a variety of sectors. Here are seven falling stocks to stay far away from.
Falling Knives: PetroChina (PTR)
PetroChina (PTR) is one of China’s biggest integrated oil firms. And up until a couple of years ago, that was a very good thing indeed.
However, now it’s trying to survive in the energy patch while also contending with demand issues in China, as growth slows. This is a very challenging combination and it helps explain why the stock is off more than 45% in the past year.
PetroChina’s refining operations should continue to do well, but it’s going to be very difficult for China to ramp up to the hyper-growth economy it had a few years ago, especially given the state of the rest of the world.
And if China is doing poorly, you can assume that the rest of the region isn’t in much better shape. PTR is not a good choice.
Falling Knives: ConocoPhillips (COP)
ConocoPhillips (COP) is the world’s largest exploration and production (E&P) company in the energy business.
And what’s the single-worst performing sector in the energy patch? E&P companies. If you want to know the fortunes of COP, simply follow the price of Brent North Sea Crude; they’ve been running in lockstep for the past year or more.
Add to COP stock’s woes the fact that it finally had to cut its dividend last week, which didn’t help its momentum, or its stock price. Meanwhile, revenue fell 45% in 2015, and 2016 isn’t shaping up much better.
There is no point playing the E&P sector right now; it’s riskier than buying a single product biotech with a massive burn rate. There may not be much more downside from here, but there’s little chance the upside is around the corner.
Falling Knives: Deutsche Bank (DB)
A lot of its credentials come from being a German bank, since the German economy is one of the strongest in Europe, so DB is one of the strongest banks. Unfortunately, that’s not saying much these days, given Europe’s moribund economy. Perhaps worse, the bank has been involved in various scandals, which continue to increase. That means restructuring at some point.
But right now, there are more pressing problems, including concerns that DB may very well be Europe’s Lehman Brothers.
Yes, the stock pays a 5% dividend, but don’t fall for it. It’s as fragile as the financial sector at this point.
Falling Knives: Twitter (TWTR)
Twitter (TWTR) has become the pre-eminent micro blogging site on the planet.
The technology behind this achievement isn’t incredibly impressive, it just ended up the platform of choice, with its arbitrary 140 character limit. Granted, there’s a certain simple elegance to the concept but it’s of fairly limited value.
And value is really what it’s all about once you’re a public company, as Facebook (FB) knows as well. You can have hundreds of millions of users (as TWTR does) but if you can’t find a way to monetize them, the value proposition isn’t there.
FB has found a way. TWTR hasn’t.
If you compare their returns since TWTR went public in November 2013, you see the story clearly. Both actually started about even but since then, FB is up 105% and TWTR is down 62%.
Add recent senior level management shake-ups to that mix and you have plenty of red flags.
Falling Knives: Telefonica Brasil (VIV)
It is one of Brazil’s largest telecom companies, combining land lines, broadband, mobile and entertainment. It also sports an 8.2% dividend yield.
So, what’s the problem? Brazil is the problem. The country is an economic basket case, the government is embroiled in huge scandals and it’s scrambling to find money to build facilities to host the Summer Olympics.
And then there’s the problem of the Zika virus, which is highly prevalent in Brazil. That means tourism is going to take a serious blow.
Brazil is major agricultural supplier to Europe and Asia, and with prices for most commodities sitting near lows, this isn’t going to help either.
If you really want to buy a telecom stock, there are much better options with much safer dividends.
Falling Knives: Vale (VALE)
Vale (VALE) is a Brazilian based metals and mining company. Yes, those two words — Brazil and mining — in the same sentence already explain a majority of this company’s problems.
But VALE isn’t tied to Brazil’s fortunes as much as it is the rest of the developed and developing world. It mines the base metals that go into making steel and other major finished metal products.
The problem is, with growth at a standstill around the world, there isn’t much demand for its commodities. What’s happening to most of these metals miners is akin to what happened to the banking industry in 2008. They were overextended on demand from China and Asia and when China dried up, there was no place to turn to offset the losses.
It’s taken of few years to ingest all this, but the sector is now being hammered from all sides. There’s no opportunity here, now.
Falling Knives: Union Pacific (UNP)
Union Pacific (UNP) is one of the largest transportation companies in the U.S., specifically in the West. It operates in 23 states with operations at all the major U.S. ports on the West Coast.
Charles Dow (the founder Dow Jones, and editor of The Wall Street Journal), had a theory, called the appropriately, The Dow Theory. It’s still in use today, having been refined a few times over the years.
The basic point of the theory is that transportation stocks and industrial stocks work in tandem and you can predict where the market will be by examining how they relate.
For example, UNP, a Transport, is down 37% in the past year. An Industrial like Caterpillar (CAT), is down 25% in the past year. That tells us fewer people are buying fewer things and that means less items need to be transported. Add a weak energy sector and I think you get the idea.
Louis Navellier is a renowned growth investor. He is the editor of five investing newsletters: Blue Chip Growth, Emerging Growth, Ultimate Growth, Family Trust and Platinum Growth. His most popular service, Blue Chip Growth, has a track record of beating the market 3:1 over the last 14 years. He uses a combination of quantitative and fundamental analysis to identify market-beating stocks. Mr. Navellier has made his proven formula accessible to investors via his free, online stock rating tool, PortfolioGrader.com. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.