Picking the right stocks for your portfolio can be a tricky business. Indeed, even the professionals get it wrong on a regular basis.
So, in this article, I’m going to take a look at two stocks that I am avoiding at all costs.
High street struggles
For the past few years WH Smith (LSE: SMWH) has been able to defy the gloom on the high street by investing in its travel business, stores located in destinations such as airports.
According to its trading update today, for the 13 weeks to 2 June total group sales were up 4% with like-for-like sales up 1% compared to last year, led by an 8% increase in sales at its travel business. Like-for-like high street sales fell 1% for the period.
Understandably, the company is focused on expanding where it’s strongest, and that’s in travel retail. The firm says it’s on target to open between 15 and 20 travel units in the UK throughout the rest of 2018. A further eight units are planned internationally bringing the total number to open internationally to 282.
However, selling sweets and drinks to captive customers in airports is one thing, trying to attract customers into your stores on the high street is something else altogether. And this is where WH Smith seems to be struggling.
A survey of more than 10,000 consumers by Which? recently declared WH Smith the worst high street retailer in the UK. I’m worried about the impact this might have on the brand.
I’m also concerned about WH Smith’s valuation. Analysts are only expecting earnings growth of 5% for the 2018 year. But the shares trade at a forward P/E of 18.1, which looks extremely expensive compared to the firm’s growth.
Overall, even though WH Smith is registering sales growth, the company’s sour reputation with customers and high valuation puts me off the stock.
Satellite communications company Inmarsat (LSE: ISAT) was once a stock market darling, but the business has struggled to live up to expectations and, as a result, its share price has been crushed.
The stock has fallen from its all-time high of 1,111p in 2016 to just under 400p today, as earnings slumped. After reporting earnings of $0.72 per share in 2014 — a high point for the group — they’ve since declined to $0.40 for 2017. And analysts are not expecting an upturn anytime soon. A further decline of 14% is pencilled in for this year, followed by a further decrease of 42% to $0.22 for 2019.
Based on these disastrous forecasts, shares in Inmarsat are trading on a 2019 P/E of 24. To me, this valuation seems nonsensical, especially as earnings will have fallen by two thirds in five years by 2019. In fact, I believe shares in Inmarsat could fall further in the weeks and months ahead, unless it conjures up some growth for 2019.
The company’s one redeeming feature is its 4.3% dividend yield. Although based on current City numbers, in 2019 the payout of $0.23 won’t be covered by earnings per share. The firm also has a dangerous level of debt.
All in all, unless Inmarsat can reverse course over the next 12 months, I believe it’s best to avoid the stock.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended WH Smith. 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.