3 stocks I’d avoid at all costs

These three stocks have all been touted as potential millionaire-makers at one time or another. G A Chester explains why he’s steering well clear.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Many investors look to London’s junior AIM market for stocks with millionaire-maker potential. However, despite there being hundreds of companies on AIM, history shows big winners are few and far between.

Often, the growth potential of a stock turns out to have been over-egged, or a case of the emperor’s new clothes, and investors end up with a substantial loss. In these situations, three things we commonly see flaws in are the business, the transparency of its financial reporting, and its market valuation.

5 Stocks For Trying To Build Wealth After 50

One notable billionaire made 99% of his current wealth after his 50th birthday. And here at The Motley Fool, we believe it is NEVER too late to start trying to build your fortune in the stock market. Our expert Motley Fool analyst team have shortlisted 5 companies that they believe could be a great fit for investors aged 50+ trying to build long-term, diversified portfolios.

Click here to claim your free copy now!

With this in mind, three stocks I’m currently avoiding are Purplebricks (LSE: PURP), First Derivatives (LSE: FDP) and Telit Communications (LSE: TCM).


Business: I’ve serious doubts about the long-term viability of online estate agent Purplebricks, due to diminishing revenue returns from increasing marketing spend. In its latest financial year, it eased back modestly on UK marketing in the second half, and saw second-half revenue plunge by £6.5m. It also swung to an operating loss.

Reporting: Purplebricks refuses to disclose the number of its instructions that result in a completed sale. I’ve seen an increase in dissatisfied customers on Trustpilot recently. ‘Bad’ ratings in the last 475 reviews are running at three times the historical rate. I suspect this is a further indication the business is going backwards.

Valuation: At a share price of 110p, Purplebricks is valued at £337m. This is 2.8 times my estimate of trailing revenue of £119m from continuing operations. The rating is far too high, in my view.

First Derivatives

Business: New technology is a sector to which investors seeking millionaire-maker stocks are naturally drawn. Companies in the sector can readily fashion impressive-sounding growth stories. A few buzzwords, a collaboration with a tech giant, and talk of multi-billion-dollar addressable markets can do wonders for investor excitement. Fintech and martech specialist First Derivatives is a case in point.

Reporting: The company’s accounts came in for severe criticism last year from renegade City analyst Matt Earl’s ShadowFall outfit. While First Derivatives has been valued as a high-performing software company, ShadowFall reckoned that on a true view of the accounts, it has the characteristics of a low-margin consultancy or recruitment business.

Valuation: When paper profits are questionable, my default valuation measure is free cash flow. First Derivatives generated around £6m last year. Against this, its market valuation of £574m at a share price of 2,150p is far too rich in my book.

Telit Communications

Business: Another new technology stock is “global enabler of the Internet of Things” Telit Communications. It sold its automotive solutions division earlier this year, reduced its debt, and reported a net cash position at the half-year end.

Reporting: Back in 2017, I showed how Telit’s accounting enabled it to post impressive paper profits, while generating little or no free cash flow. A few months later, founder and chief executive Oozi Cats and his wife Ruth (apparently on the payroll as an ‘art curator’) were exposed as fugitives from historical fraud indictments, and high-tailed it out of Dodge.

Valuation: Cats remains at large and a major shareholder (dealing in the stock as recently as last month). But with new faces in the boardroom, how should we value the remnants of his empire? At a share price of 155p, the market says £206m. I say, show me the free cash flow to justify it.

Is this little-known company the next ‘Monster’ IPO?

Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.

Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.

The Motley Fool UK analyst team has just published a comprehensive report that shows you exactly why we believe it has so much upside potential.

But I warn you, you’ll need to act quickly, given how fast this ‘Monster IPO’ is already moving.

Click here to see how you can get a copy of this report for yourself today

G A Chester has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Buffett at the BRK AGM
Investing Articles

I’m listening to Warren Buffett about investing for the future

How does Warren Buffett incorporate an uncertain future into his investment strategy? Christopher Ruane explores what he's learnt from the…

Read more »

Worker on sofa and team on laptop screen talking and discussion in video conference and dog interruption.
Investing Articles

The Alphabet share price has fallen 25%. Time to buy?

The Alphabet share price has fallen sharply in 2022 -- and our writer scents a buying opportunity for his portfolio.

Read more »

Close-up of British bank notes
Investing Articles

How I’d invest a Stocks and Shares ISA to target yearly dividends of £1,350

Our writer reckons he could invest a £20,000 Stocks and Shares ISA to generate substantial dividend income. Here's how he…

Read more »

pensive bearded business man sitting on chair looking out of the window
Investing Articles

UK shares to buy now: how I’d invest a £1,000 lump sum

Our writer highlights some shares to buy now for his portfolio that he hopes offer both growth and income prospects.

Read more »

Investing Articles

3 top FTSE 100 shares to buy in a recession

Our writer explores three FTSE 100 shares that could protect the value of his stock market portfolio in the event…

Read more »

A Rolls-Royce employee works on an engine
Investing Articles

Could I double my money with Rolls-Royce shares?

Rolls-Royce shares have been on a downward track this year amid ongoing-pandemic related challenges. But is now a good time…

Read more »

Smiling senior white man talking through telephone while using laptop at desk.
Investing Articles

Down 50%, are Scottish Mortgage shares a bargain growth pick?

Scottish Mortgage shares have been on a steep downward track over the past six months. Down more than half, is…

Read more »

Note paper with question mark on orange background
Investing Articles

4 reasons why I would — and wouldn’t — buy Tesco shares for June

I’m looking for the best FTSE 100 shares to buy in early June. Is Tesco a brilliant blue-chip I should…

Read more »