Invest Like Warren Buffet: Avoid These 3 Falling Knives

Investing like Warren Buffet means knowing what to invest in and what not to invest in. Read about these “falling knives” Gildan Activeware (TSX:GIL), Extendicare (TSX:EXE) and Teck Resources (TSX:TECK.B).

| More on:
close-up photo of investor Warren Buffett

Image source: The Motley Fool

With stock markets now beginning to sell off, contrarian investors, like Warren Buffett, now have quite a few options to choose from. Contrarian investors look for potential value in companies they feel have been hammered unfairly by investors.

Today I’m going to discuss three contrarian-looking companies with which I’d suggest caution.

Gildan Activewear

Perhaps in a dying industry, Gildan Activewear (TSX:GIL) has hummed along quietly as one of those oft-forgotten companies producing essential goods we often take for granted. The Canadian supplier of underwear, t-shirts and other textiles had an interesting earnings release at the end of February.

The company increased its dividend distribution by 15%. Their profit forecast underwhelmed investors and revenue declines were worrisome to many. This news item essentially wiped out all gains investors have seen over the past five years.

Some contrarian investors might think now may be a good time to jump in and pick up the pieces (and a juicy dividend to boot). However, I don’t see the long-term outlook for Gildan improving over time. I would caution investors with a long-term time horizon to search elsewhere for yield and value at this time.

Extendicare

Extendicare (TSX:EXE) is not really what one may qualify as a falling knife. While the company’s share price is down approximately 20% over the past three years, many view this as a safety/defensive play. I disagree for a few reasons.

My take on the aging boomer trade is that most, if not all, of the future growth expected in companies like Extendicare, that provide home care services to retirees, has already been priced in by financial markets.

Additionally, I believe key risks aren’t being priced in adequately. These include high levels of competition, particularly in key Canadian markets in which Extendicare operates.

Another key risk is the rising cost of healthcare workers, which will outpace inflation over the long term. Thus, margin deterioration is not being factored in right now to the appropriate degree. I worry that investors looking for sectors that may bounce back may incorrectly bet on this segment of the market.

I believe this market segment will likely decline for the next 5-10 years because of the real supply/demand issues coinciding with cost uncertainty.

Teck

Canadian resource/mining company Teck Resources (TSX:TECK.B) has been on a very rough ride of late, down approximately 50% on a year-over-year basis. This market decline has been driven by a number of issues.

The recent news of the company’s decision to withdraw its application for its massive Frontier Oil Sands mine and take multi-billion dollar write downs accordingly on both Frontier and Fort Hill’s oil sands mines drove investor sentiment lower.

The company has also cut its sales forecast for its metallurgic coal operations, leaving investors without anything positive to hang their hats on, hence the selloff.

For contrarian investors, I think Teck is just too risky at this point in time relative to other options on the TSX. I would encourage those looking for bargains to look elsewhere at this point in time.

Stay Foolish, my friends.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

The Motley Fool recommends GILDAN ACTIVEWEAR INC. Fool contributor Chris MacDonald does not have ownership in any stocks mentioned in this article.

More on Dividend Stocks

Retirement
Dividend Stocks

Here’s the Average CPP Benefit at Age 60 in 2024

Dividend stocks like Royal Bank of Canada (TSX:RY) can provide passive income that supplements your CPP payments.

Read more »

Canadian Dollars
Dividend Stocks

How Investing $100 Per Week Can Create $1,500 in Annual Dividend Income

If you want high dividend income from just $100 per week, then pick up this dividend stock and keep reinvesting.…

Read more »

hand using ATM
Dividend Stocks

Should Bank of Nova Scotia or Enbridge Stock Be on Your Buy List Today?

These TSX dividend stocks trade way below their 2022 highs. Is one now undervalued?

Read more »

A meter measures energy use.
Dividend Stocks

Here’s Why Canadian Utilities Is a No-Brainer Dividend Stock

Canadian Utilities stock is down 23% in the last year. Even if it wasn’t down, it is a dividend stock…

Read more »

edit Business accounting concept, Business man using calculator with computer laptop, budget and loan paper in office.
Dividend Stocks

Got $5,000? Buy and Hold These 3 Value Stocks for Years

These essential and valuable value stocks are the perfect addition to any portfolio, especially if you have $5,000 you want…

Read more »

Growing plant shoots on coins
Dividend Stocks

3 Magnificent Ultra-High-Yield Dividend Stocks That Are Screaming Buys in April

High yield stocks like BCE (TSX:BCE) can add a lot of income to your portfolio.

Read more »

grow money, wealth build
Dividend Stocks

1 Growth Stock Down 24% to Buy Right Now

With this impressive growth stock trading more than 20% off its high, it's the perfect stock to buy right now…

Read more »

Dividend Stocks

What Should Investors Watch in Aecon Stock’s Earnings Report?

Aecon (TSX:ARE) stock has earnings coming out this week, and after disappointing fourth-quarter results, this is what investors should watch.

Read more »