To be a successful investor, avoiding the wrong companies is just as essential as choosing the right ones. Unfortunately, it’s not always easy to identify the wrong companies. Still, I think there are a few characteristics that can identify bad investments. Here are five UK stocks that seem to display these telltale signs, which I would avoid.
British actions to avoid
There are two red flags that I think are overwhelming indications that a business is a bad investment. This is a high level of debt and a lack of growth.
However, just because a business meets these negative criteria does not necessarily mean that it will turn out to be a bad investment. Indeed, highly leveraged UK stocks can succeed, and companies with declining profit margins can turn the tide.
Nevertheless, I think it might be useful to avoid GlaxoSmithKline and Imperial marks for these reasons. Both have high debt levels and have struggled to increase their profits in recent years.
Glaxo’s net debt has grown from Â£ 5bn to Â£ 14bn since 2015. Its operating profit has grown from Â£ 11bn in 2015 to Â£ 8bn in 2020. Meanwhile, Imperial’s net profit fell from Â£ 1.7bn in 2015 to Â£ 1.5bn in 2020.
There is another reason I would avoid Imperial, and that is the company’s exposure to the tobacco industry.
These UK stocks are taking action to try to reduce debt and increase profitability. There is no guarantee that these will be bad investments, but I would avoid both actions according to my framework.
I would also avoid Royal Dutch Shell. This company is quite exposed to the problems of climate change, more than other UK stocks. Management’s plan to move away from fossil fuels is lacking. In addition, the group’s indebtedness has increased. If management can put a new plan in place to accelerate their energy transition, maybe I’ll come back to the stock.
Another company that falls into the bucket of UK stocks that I would avoid is Cinemonde. This company’s debt has exploded over the past 12 months and profits have been under pressure for years.
As the company has taken on debt to expand its presence in the world, profit margins are under pressure. I think it could be years before the group can rebuild themselves to pre-Covid levels. That’s why I would avoid the stock.
However, if profits exceed expectations, the company may be able to reduce debt faster than my numbers predict. This can lead to a positive outcome for shareholders.
The last business I would avoid is Restaurant group. The owner of Frankie & Benny’s and Wagamama was forced to close most of its restaurants last year, hurting sales.
However, sales and profits have been under pressure for years. The company has lost money in three of the past five years. Its net debt has grown from Â£ 32million to Â£ 824million in the six years since 2015. With these weak financials, I think it could be years before the group has recovered. .
On the other hand, it can outperform if consumers return to the company’s restaurants quickly. This would allow him to get out of debt and invest in operations. On this basis, some investors might see this as a game of recovery to be held in a basket of UK stocks.
The post 5 UK stocks I would avoid appeared first on The Motley Fool UK.
Rupert Hargreaves has no position in any of the stocks mentioned. The Motley Fool UK recommended GlaxoSmithKline and Imperial Brands. The opinions expressed on the companies mentioned in this article are those of the author and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. At The Motley Fool, we believe that considering a wide range of ideas makes us better investors.
Motley Fool United Kingdom 2021