Offense wins games, but defense wins championships...
5 Stocks to Keep Avoiding in 2023
Editor's Note:TradeSmith will be closed Monday, May 29, for Memorial Day.
There's a saying that offense wins games but defense wins championships, and when you think about it, that's a great way to think about investing.
You have to have a good offense — investing in the right companies and making the right options trades — in order to generate the returns you need to pay off debt, build up your nest egg for retirement, or support your kid's or grandkid's college fund.
Finding winners and watching them turn your money into more money is the flashy offense of your investing portfolio… and it's plenty of fun to watch.
But it's all too easy to let bad investments slip into the mix — to be tempted by stocks that seem like sure things or a quick way to make a buck but have hidden flaws that could endanger your portfolio. And making sure that these “Trojan horses” don't breach your walls is part of having a good defense.
Think about the most recent Super Bowl as an example.
It didn't matter that the Philadelphia Eagles scored 35 points; they weren't able to stop the Kansas City Chiefs from putting 38 points up on the scoreboard, allowing Patrick Mahomes to earn his second Super Bowl ring.
The lesson is that it doesn't matter how much you make with your “offensive investing attack” if you let bad investments slip in and negatively impact your total returns.
That leads me to a list of five stocks to avoid in 2023 that I shared near the end of last year.
As we approach the halfway point of the year, it's the perfect time to revisit that list so that you can protect yourself from some damaging portfolio parasites.
With meme stocks like AMC, the stock price can surge at a moment's notice, but the problem is that you can't time that moment and are likely to buy high and sell low.
🍿 All the reasons I didn't like AMC in 2022 still exist in 2023: Fewer people are going to movie theaters compared to before the pandemic; the company seems more focused on gimmicks than on improving its core business (purchasing a stake in a gold miner being just one example); and the company just keeps losing money (reporting a net loss of $179.7 million in the first quarter of 2023).
AMC continues a trend each quarter of spending more than it makes. Unless you too want to lose more money than you earn, there's not much of a case to be made for investing in this company.
🚜 One of my original concerns with Tractor Supply Co. was the increase in prices to produce goods and TSCO's ability to pass those increases on to consumers. As more of a niche retailer for outdoor hobbyists, it offers "nice-to-haves" rather than “need-to-haves” for most people — meaning that when the average consumer's finances get tight, they're more likely to spend their money on groceries and gas than on a beginner beekeeping or chicken coop kit.
TSCO will have to keep dealing with elevated costs of producing goods for the foreseeable future, as the Producer Price Index (PPI) rose 0.2% month-over-month from March to April.
🧺 For Whirlpool, what helps fuel new purchases is a hopping housing market, and with home sales falling for 12 consecutive months, it has a smaller pool of potential buyers to sell to. Also, the cycle of replacing appliances tends to be a slow one; most washing machines, refrigerators, and ovens can last 10 years or more.
🦷 Colgate-Palmolive sells something people do need every day — toothpaste and other personal care products — but it is another company that has to deal with rising producer costs, and it only has so much room to pass those costs on to the consumer.
With inflation staying so high, most people aren't going to bat an eye about changing dish soap brands, and in the event of a recession, the Harvard Business Review reported that consumers have less brand loyalty and are inclined to settle for alternatives.
🏦 PNC Financial Services Group, much like Whirlpool, has to worry about the housing market, as well as any additional chaos in the banking sector that could collectively send bank stocks lower.
With interest rates as high as they are, people are more likely to delay buying a home, which means there is less of a demand for loans. Plus, it's possible that the Fed isn't done hiking rates, which could tip the economy into a recession, further deadening the market to buy and sell homes.
Bottom line: Outside of AMC, these stocks appear attractive on the surface, as they all offer dividend payouts and seem to serve essential purposes in certain sectors. But all of these companies have issues that are going to limit their profitability, and even just a small miss in revenue or EPS is enough to send a stock price free-falling. AMC, WHR, TSCO, CL, and PNC should not be anywhere near your portfolio for the rest of the year.
And now that you know how to play good defense, I want to share with you how you can add some “offense” to your investing game. I recently recorded an urgent broadcast about “The Profit Cycle,” or what I call “cash-flow positive” investing. It pays out weekly cash income through my trade recommendations, so you are never relying on unrealized paper gains to fund your life.
TradeSmith is not registered as an investment adviser and operates under the publishers' exemption of the Investment Advisers Act of 1940. The investments and strategies discussed in TradeSmith's content do not constitute personalized investment advice. Any trading or investment decisions you take are in reliance on your own analysis and judgment and not in reliance on TradeSmith. There are risks inherent in investing and past investment performance is not indicative of future results.
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