I like to invest in high-quality businesses that will generate strong, predictable free cash flow growth now and in the future. Unfortunately, not every company fits this criteria, including — I think — the following three high-profile firms listed in the UK.
UK share #1: Argo Blockchain
Argo Blockchain (LSE: ARB) is a Bitcoin mining firm that has caught the attention of many investors in recent months. That makes sense given that last year, the company managed to grow revenues 120% and produce a profit for the first time thanks to the surge in the price of Bitcoin. As a result, investors have piled into the stock pushing the share price up 370% year to date.
But the problem I have with Argo Blockchain as an investment is that the company is so dependent on the price of Bitcoin. This is dangerous because Bitcoin is very volatile making it extremely difficult to predict what the price will do next. In turn, this makes it very difficult to forecast future earnings for Argo Blockchain, I feel.
UK share #2: Deliveroo
The next UK share I’m avoiding is online food delivery company, Deliveroo (LSE: ROO). This company certainly grabbed attention when its IPO flopped spectacularly with the share price falling 26% in one day. At the time of writing, Deliveroo shares are trading 35% below their initial listing price, leaving me wondering if this is a good time to invest.
But I think not. My issue with this stock is that the company is still unprofitable. Last year, Deliveroo recorded a loss of £226mn. Losses are slowly coming down. However, I think stiff competition from Uber and Just Eat, as well as questions over how the company treats its employees will make it difficult for it to turn losses into strong profits any time soon.
Deliveroo did grow at an impressive 54% last year and has built a large user base with 7.1 million monthly active users currently on its platform. However, I still think the lack of profits makes Deliveroo shares too risky for my own portfolio.
UK share #3: BP
The last company I’m avoiding is oil company BP (LSE: BP). Since the start of the year, the share price is up over 20% following the steady increase in the price of oil. This trend, coupled with its large dividend yield (7.9% in 2020), has attracted many investors to the shares.
My personal problem with BP is similar to my issue with Argo Blockchain in that the company is heavily dependent on the unpredictable and volatile price of oil. This volatility has translated onto BP’s profit and loss statement which shows two losses in the past five years and no meaningful upwards trend in revenue. As such, it’s extremely difficult to predict with any degree of certainty what earnings the company will achieve in the future.
One positive sign for the BP is its planned transformation from being an international oil company to being an integrated energy company. This should make the business less reliant on the price of oil in the future. However, it will be years before this change has a significant impact on the bottom line. As such, I won’t be adding BP shares to my portfolio.
Ollie Henry has no position in any shares mentioned. The Motley Fool UK has recommended Just Eat Takeaway.com N.V. and Uber Technologies. 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.