COMMENT
Growth Shares To Avoid

I like dynamic small-cap shares, especially those with a new story to tell. But not every growth company appeals to me. In fact, I'm actively avoiding one emerging sector in particular.

I'm talking about the new breed of 'debt management' firms, such as Debt Free Direct (LSE: DFD), Debtmatters (LSE: DEBT) and Accuma (LSE: ACG). These companies arrange Individual Voluntary Arrangements (IVAs) on behalf of debt-burdened consumers.

(An IVA is an alternative to bankruptcy and is essentially a favourable re-arrangement of payments to creditors. For their trouble, the debt management companies take an initial set-up fee and/or a slice of every repayment from the individual. IVAs are explained in more detail here and their growing 'popularity' is reviewed here, here and here.)

Business at Debt Free, Debtmatters and Accuma is booming. Recent results at all three showed turnover up at least 100% as Britain's £1 trillion of consumer debts starts to unravel. But despite some very upbeat prospects, there are three reasons I'm avoiding IVA shares:

1. Cash-strapped clients: Who'd want to rely on near-bankrupt consumers for their income? Not me. Apparently, one in four IVAs does not go the distance. In my experience, specialist finance companies with unwilling/hard-up clients can come unstuck. Read more.

2. Free competition: There are plenty of free alternatives around. For instance, residents of the Fool's Dealing with Debt discussion board cite Payplan and the Consumer Credit Counselling Service as no-cost substitutes. These rivals may well become bad for business. Read more.

3. Poor cash flow: Companies in this sector appear to have terrible cash flow. Recent results from Debt Free, Debtmatters and Accuma all showed cash flow being swallowed up entirely by working capital demands. In my opinion, such poor cash generation among fast-growing small-caps typically heralds trouble. Read more.

Invitation to lose money

It's tempting to jump on the debt management bandwagon. Since flotation in late 2002, shares in Debt Free are up about 500%, while those of Debtmatters and Accuma have doubled after joining the market earlier this year.

But troubled customers, free rivals and poor cash generation suggest to me investing in debt management companies is an invitation to lose money.

I much prefer my shares to have reliable customers, good competitive positions and decent cash flow. I've already recommended six shares that fit the bill for Champion Shares. My recommendations may not provide the supersonic returns already witnessed by IVA shares, but I firmly believe they will prove far less troublesome in the future. You can decide for yourself with this 30-day free trial of Champion Shares.