3 popular FTSE stocks I wouldn’t touch with a 10-foot pole right now

In this article I highlight three FTSE stocks that are currently popular among investors that I think are bound for negative returns.

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There are two types of companies: winners and losers. Often the market endorses a loser through the popularity of its stock. As human beings, we’re irrational and markets are inefficient. This means markets and people can often be wrong. That being said, I could be wrong about these FTSE stocks that I think are losers. However, my analysis of their current business models under current conditions has me convinced to steer clear.

Delivering losses

This one will sound blasphemous to some, but let’s face it — despite its more recent popularity, Ocado (LSE: OCDO) is a loss-making machine. In the 11 years since listing in 2010, it only turned over a profit between 2014 and 2017. Unfortunately, those profits were razor-thin. This hasn’t hampered the valuation of this stock in any way though. In fact at one point last year, Ocado was so popular with FTSE investors that it is was the UK’s most valuable retailer with an absurd £21.6bn valuation.

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This was in spite of the fact that Tesco, which was valued at £21bn, sold 27% of the UK’s groceries last year. Ocado, on the other hand, had less than 2% market share. I get it, the technology driving Ocado’s platform is exciting. I like that it’s firmly in the green when it comes to debt ratios. However, despite surging sales during the lockdowns, somehow Ocado still managed to keep making losses. This is inexcusable in my opinion.

Turbulent skies

Rolls-Royce (LSE: RR) is next. The embattled aero-engine manufacturer recorded a loss of about £5.4bn last year. Unfortunately, this company is also drowning in debt. Sales of large engines from 2019 to 2020 halved and due to the uncertainty of the pandemic, fewer flying hours for planes means less servicing and therefore less revenue. The latest quarterly earnings showed a profit of £394m, which is good but not good enough. The great news for the FTSE 100‘s worst performer in 2020 is its recent contract with the US Air Force. Rolls-Royce secured a £1.9bn deal to replace the engines on its Stratofortress bomber fleet. Since the vast majority of its business comes from civil aviation contracts though, I’m extremely sceptical given the current state of the industry.

Lights, camera, action?

The cinema business worldwide has battled over the past two years. That’s only natural given the Covid-19 situation. I, therefore, sympathise with Cineworld  (LSE: CINE). You don’t become the world’s second-largest cinema company unless you’ve got a solid model underneath you and perhaps that’s the bullish case for this FTSE favourite. However, with more restrictions looming on the horizon, I cannot see how any positive growth or earnings projections for this company can be assured. Even though movie fans flocked to cinemas to see James Bond last month, shares were still down 20% in November. Fortunately, there doesn’t seem to be any evidence that the growth of streaming platforms will damage this business model yet. However, with massive debts and losses piling up over the last 12 months, I won’t be sticking around for this show.

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Stephen Bhasera has no position in any of the shares mentioned. The Motley Fool UK has recommended Ocado Group. 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.

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