There are many tools designed to help investors analyze their portfolio holdings and to ultimately weed out undesirable or riskier stocks.
Financial analysis is always helpful, of course, but studying companies’ balance sheets and their filings requires a lot of time and effort.
For the most recent stock screen I shared with my Fast-Track Millionaire subscribers, I chose one of the “less-available” ratios to search for companies with questionable financial health, with the ultimate goal of locating a set of stocks investors are better off avoiding.
As a second measure, I reviewed revenue growth from last year.
But let’s start from the beginning.
A good measure of a company’s overall health is Return on Equity (ROE). This financial ratio shows, generally speaking, how much profit is generated for shareholders’ equity stake.
A negative ROE is, clearly, not a desirable thing in a company. It could indicate negative profitability (that is, that the company is a money-losing enterprise), but it can also demonstrate that shareholders are at a disadvantage by getting a negative return on their equity. In any case, screening for a negative ROE is the subject of today’s screen — with a goal of culling those negative ROE companies off the watch/buy lists for the time being.
(A note of caution: screening for financial ratios relies on “raw” balance sheet data and, moreover, as with any screen, this negative ROE screen is just a first step in the research process.)
Here are the top five (or should I say the bottom five?) companies from today’s screen.
1. Toy-maker Mattel (NYSE: MAT) had its first money-losing year in at least 10 years last year. The company, a major supplier to the now bankrupt Toys-R-Us, lost $1.49 per share in 2017, and even though these losses are going to be smaller this year, it’s still likely to lose more than a $1 per share. The company is fighting the trend of declining revenue (it has not had a year of sales increases since 2014) and it had to discontinue its dividend a year ago.
2. Industrial conglomerate General Electric (NYSE: GE) is also a troubled company. Its declining revenue has hit the bottom line hard (in 2008, GE sold nearly $181 billion worth of goods and services and made $1.93 per share; last year (2017) GE’s revenue dropped to $120 billion and the company’s per-share profits declined to $1.18).
3. Newell Brands (NYSE: NWL), a major houseware company, has also seen better times: this year will be the first year since 2014 of revenue decline, but this decline is expected to be massive, about 40%. The company’s profits are on the decline, too, although this slide is slower ($2.33 this year vs $2.55 in 2017 and $2.65 in 2016). One positive: its dividend is still intact (and it’s not currently projected to be eliminated or even cut).
4. Qualcomm (Nasdaq: QCOM), a major chip-making company, has nearly $68 billion of cash on the balance sheet. This plus the company’s $30 billion share buyback program make it difficult to bet against it. However, QCOM is locked in a legal battle with Apple (Nasdaq: AAPL). At stake: QCOM’s generous royalty revenue stream. This uncertainty presents a major question mark in the future of QCOM.
5. Dentsply Sirona (Nasdaq: XRAY), a dental supply company, has been posting smaller profits for three years running, although 2018 is the first year of declining revenue in three years. This indicates margin pressures for this slow-growth company.
Please keep in mind that the investing ideas I present here are intended to provide a good starting point for further research. As with any quantitative tool, my Fast-Track Millionaire stock screens should not be used in isolation. You need to evaluate other fundamental characteristics of every potential investment opportunity to determine if it is right for your portfolio.
With that being said, I would not touch any of the stocks found in today’s screen. Each of these companies has challenges that might allow investors to go unscathed in a different market environment than we find ourselves today — but in this climate, the risk just appears to outweigh the reward far too much.
— Genia Turanova
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Source: Street Authority