Here at The Motley Fool, you will find plenty of ideas for stocks to buy and hold forever. These stocks tend to have strong management teams, sustainable business models, and trade at reasonable valuations. But to provide proper context, it is also useful to look at the other side of the coin.
Shown below are companies that each fail one of the criteria listed above. And while any one of them could see a rising share price, in my opinion, it’s best not to touch these companies with a 50 foot pole.
Poor management: Just Energy
Just Energy (TSX: JE)(NYSE: JE) makes its money from selling natural gas and electricity contracts to residential and commercial customers. The company’s salesmen are paid 100% based on commission, which has led to numerous complaints of deceptive sales practices. In fact the Ontario Energy Board has fined the company multiple times for violating marketing practices. The Better Business Bureau for central and southwestern Ontario has even refused to allow Just Energy to join. The contracts have also been shown to generally be a really bad deal for consumers.
The company also has a history of deceiving investors. Numerous reports have been written about the company’s deceiving financial metrics (such as “adjusted EBITDA”) that exclude ongoing costs of doing business, such as marketing expenses.
Furthermore, Just Energy’s liabilities exceed the value of its assets, reflecting the company’s history of unprofitability. Oddly the company pays out a fat dividend, but at this pace, that cannot last forever.
Weak moat: AGF
When times are good, there is no better business model than asset management. As new money flows in through the door, revenues grow much faster than expenses, which boosts margins. But when times are bad, that dynamic goes in the opposite direction, and that can be ugly.
And that is what AGF Management Ltd (TSX: AGF.B) is facing. Over the past five years, its retail assets under management (AUM) has declined by 9.6% per year, and its institutional AUM by 12.8%. Poor performance has hurt the company; only 30% of AGF’s retail funds have outperformed its category median over the past three years. So the defections may continue.
Unreasonable valuation: Ballard Power
Of the three companies, fuel cell technology provider Ballard Power (TSX: BLD)(Nasdaq: BLDP) sells by far the best product. But the company’s valuation is off the charts, making the shares more of a gamble than an investment.
To illustrate, Ballard made 61 cents in revenue in 2013 – at $4.42, the shares currently trade at over 7 times revenue. This is a very unreasonable multiple even for most profitable companies. And Ballard is not profitable, having lost 20 cents per share last year.
Ballard’s technology is very promising, but this valuation brings back memories of the dot-com bubble of the late 1990s. And we all know how that ended.
Foolish bottom line
In investing, often the best shots are the ones you don’t take. And while the stocks above could turn out well, they are a gamble not worth taking.