Identifying which stocks to avoid will help you weed out the duds and hone in on stellar performers. To complete that task, I investigate the same information that I do when deciding to purchase a growth stock. However, the directions that I look for in each of my criteria is different. Let’s investigate some indicators that will help you determine the type of stocks to avoid. While these aren’t the only indicators to look for, they are the main indicators that can narrow down possible stock picks.
Annual revenue growth
When looking at a stock, the annual revenue increase is one of the first components I analyze. When attempting to weed out those that appear destined for failure, I still look at the annual revenue, but I make sure the company is continually experiencing a downward trend. Pitney Bowes Inc. (NYSE:PBI) has lost an average of 3% of revenue in each of the last four years. The company’s price fell by half during the recession, and it has continued to fall along with revenue. Annual revenue decreases have become a habit for this global software and hardware provider. And in the technology industry, where the titans usually come out on top, it’s easy for companies such as Pitney Bowes Inc. (NYSE:PBI) to become obsolete. The steady decline is largely attributed to weak demand for mail, as Pitney Bowes Inc. (NYSE:PBI) is largely invested in mail and document services. While the company has noted in its most recent quarterly report that demand for mail has increased, the overall trend is still bearish.
Unlike growth stocks, where I look for at least a 10% profit margin, a company with less than 5% should be avoided. Frontier Communications Corp (NASDAQ:FTR) has more than doubled its revenue in the last four years, but the cost of that revenue is massive. Despite going from nearly $2.1 billion in revenue in 2009 to over $5 billion in 2012, the profit margin has substantially decreased. In 2009 profit was nearly 6%, and in 2012 profits dropped to about 3%. The increased revenue could get investors overly excited about the stock, but if the company isn’t keeping costs down, trouble is on its way.
The industry of the stock is also very important in attempting to predict a company’s future performance. I am bearish on the oil sector, as I think the days of mass use of the energy source is numbered. Cleaner forms of energy are making their ways into the mainstream. If the use of cleaner forms of energy increases, it will be more difficult for small companies heavily weighted in oil to continue to profit.