Two stocks I’d avoid in 2020

Michael Taylor looks at two stocks that he is avoiding.

| 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.

Investing is as much about not losing money as it is about making it. The cumulative nature of losses mean that any drawdowns in a stock of over 50% mean we need to achieve a 100% return just to get back to where we were.

Warren Buffett was exactly right when asked what his investing rules were: “Rule number one: don’t lose money. Rule number two: follow rule number one“. 

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!

Over the last few years, we have seen many stocks go under, such as Interserve, Carillion, and Thomas Cook Group, and the common denominator was that all three businesses were saddled with large amounts of debt. 

Other reasons to avoid stocks are because of failing business models, or because they are overly reliant on external funding.

Too many problems

One stock that I would avoid this year is Rolls Royce (LSE: RR). This stock has been struggling to turn itself around for years, and problems with the Trent 1000 engine are persisting. Already the company has said that it is likely there will be a £1.4bn exceptional charge to operating profit because of this issue, and there is no guarantee that the problem won’t become any worse. 

The company also mentioned in its recent trading update announced that, despite improved trading, full-year operating profit and free cash flow would be towards the lower end of guidance ranges.

The company does expect to generate £1bn of free cash flow – so it’s not all bad news – but with the amount of stocks available to buy I will be avoiding this one. 

Not enough certainty 

The future of Sirius Minerals (LSE: SXX) is unclear, and until there is some clarity on both the cash position and financing of the polyhalite project, shareholders are going to be in the dark on the business’s future. 

One thing that I have learned is that the chances of successfully avoiding large losses increase when you avoid stocks that could go bust. This is subjective, but while many private investors were tempted to buy stocks such as Thomas Cook and Carillion, I avoided them because I felt the equity was like purchasing a lottery ticket. 

I generally avoid stocks that are leveraged with debt twice over (a net debt to equity ratio of two), because in the event of a stock going bust, bondholders always get the first scraps of a business. Very often, there is nothing left for shareholders.

That is what I believe could happen at Sirius Minerals. If the company can’t raise enough funds to continue as a going concern, then the stock may collapse and the project could be picked up for a few pennies in the pound from an external party – wiping shareholders out completely. 

That said, if the company does get financing, then the investment case becomes a different story

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

Michael Taylor does not have a 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

Hand flipping wooden cubes for change wording" Panic " to " Calm".
Investing Articles

This cheap share fell 30% last week. I’d buy now

This huge US corporation saw its shares crash by 30% last week. But I'd buy this surprisingly cheap share now…

Read more »

Various denominations of notes in a pile
Investing Articles

These 7 shares produce passive income of 7% to 11% a year!

Passive income is extra money I make without working. By buying these seven shares, I could earn 8.9% a year…

Read more »

A person holding onto a fan of twenty pound notes
Investing Articles

6.6%+ dividend yields! 2 FTSE 100 dividend stocks to buy

Finding the best dividend stocks to buy requires extra care today as soaring inflation takes a bite out of shareholder…

Read more »

Arrow symbol glowing amid black arrow symbols on black background.
Investing Articles

At 85p, are Rolls-Royce shares a slam-dunk buy?

The Rolls-Royce share price is in penny stock territory. Roland Head explains why he thinks this FTSE 100 stalwart looks…

Read more »

Business development to success and FTSE 100 250 350 growth concept.
Investing Articles

‘Big Short’ investor Michael Burry is buying this quality growth stock! Should I?

In the first quarter, Michael Burry bought more of this growth stock. Is this a hint that I should also…

Read more »

A beach at sunset where there is an inscription on the sand "Breathe Deeeply".
Investing Articles

Stock market crash: here’s why falling prices is good news

Over in the US, a stock market crash is battering high-priced stocks. But I see falling shares as an opportunity…

Read more »

Hand flipping wooden cubes for change wording" Panic " to " Calm".
Investing Articles

These 5 FTSE 100 shares crashed in 2022. I’d buy 1 today

Although the FTSE 100 index is flat in 2022, some Footsie shares have crashed hard this year. But I see…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

How investors can boost their passive income when the FTSE is falling

Stock markets are plagued with fears right now. Here's why I firmly believe those fears improve our passive income prospects.

Read more »