An article to greatly debate on: Stop Buying These Stocks

By Rich Greifner

April 26, 2009 | Comments (21)

A few weeks ago, my Foolish friends Brian Richards and Tim Hanson profiled five stocks they felt investors should avoid. Their argument struck me as pretty straightforward: Investors would be well-served to avoid companies with opaque financial statements (like Citigroup (NYSE: C)) or complicated government ties (like, um, Citigroup).

Apparently many members of our community disagreed.

Pointing to their significant short-term gains in stocks such as Bank of America (NYSE: BAC) and Ford (NYSE: F), many readers (rather rudely, in my opinion) insisted that Brian and Tim’s analysis was invalid.

This comment from IronBob is a good representation of the feedback that Brian and Tim received:

INCREDIBLE! Thanks for the advice! I'm glad I'm ignoring it as I almost doubled my money on Ford in less than two months!

While I’m happy for IronBob, I’d like to caution readers that his returns are hardly typical -- and that short-term speculating in no-moat companies is simply not a sound investing strategy.

Just say no ... to short-term speculation

Jumping in and out of stocks is certainly exciting, and -- if you're lucky -- it can result in some satisfying short-term profits. But over the long haul, active trading is a loser's game.

For starters, you have to correctly predict both the direction and the timing of a stock's move, which most experts agree is impossible to do with any consistency. Anyone can get lucky once or twice, but repeatedly? Forget it.

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What this means for you
In other words, if you're interested in preserving your capital and accumulating long-term wealth, stay away from short-term speculation in subpar companies.

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So what should I buy, smart guy?
That's easy. Concentrate on buying great businesses -- companies with straightforward business models, sound balance sheets, strong financial statements, and shareholder-friendly management. If you buy such businesses when they trade at a significant discount to intrinsic value, it's highly likely that you'll make a lot of money over the long term.

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I have cut shorted the article by a few paragraphs as I find the remaining portions quite repetitive. Now, here's the thing, this article bashes traders who plays the market on a short term basis, meaning buy-sell within minutes to within days or just a very short span of time.
Apparently, the stocks that the author suggested to avoid like Ford, Citi, Bank of America etc, well.. kinda made a huge turn back over the past 1-2 months, like gaining more than 100%.

With Citi lowest at $0.90, and BAC at $3+ during February lows, current trading price is at Citi $3.19, and BAC at $9.10, you can't help but say, hey, that's more than 100% increase in my portfolio! There's a huge debate as well in the comments, take a read at the comments:
http://www.fool.com/personal-finance/general/2009/04/26/stop-buying-these-stocks.aspx#commentsBoxAnchor

Now, if you are a trader, this profit margin is very good as markets in the short run is very, very efficient. Any news will either sink or tank the stock to its recent new highs or lows. The trade off is, you got to monitor the market very closely to beat the market.

Next is if you are an investor, the author is simply implying that you should not bother about the companies mentioned above because in the long run, these companies are least likely to return to their glorious moments like Citi, $60+? Take note of the key word, least likely, because in the long run, its no longer about efficiency. It's more about fundamentals, profitability and the business model of the company.

Lastly, I was a trader when I first started off, and it did gain me alot of knowledge and profits, but as time moves fast, markets became more and more unpredictable and losses start emerging. At the same time, it took a toll on my job as it was very difficult to concentrate on your job when you are losing money and now, I read alot on annual reports and invest in profitable companies which I have a clear understanding on. Although I still look at the markets occasionally, it is quite a tough habit to kick away.

Recently, I have been buying into Celestial again, averaging down to approximately $0.45 per share. After the recent surge to $0.185 and trending down to $0.155, the AGM tomorrow will be interesting as they are seeking votes to approve the rights issuance. Will the market be interested in the rights issue of Celestial? Remember my previous article on investing in a good company, here is the snapshot of its past 9 years again:

year	revenue	profit after expenses	profit after tax	EPS	ROE	ROTA	ROC	Price per share	P/E ratio	dividend	Total Equity
2000	51,100	15,100	14,300						-
2001	131,200	46,200	43,900						-
2002	226,400	89,100	71,900		51.7%		51.7%		-		139,104
2003	288,463	115,800	93,100	0.110	38.0%	18.1%	38.0%		0.00		245,203
2004	432,168	148,888	117,393	0.250	25.2%	11.5%	25.2%		0.00		465,297
2005	802,572	281,147	281,006	0.520	29.0%	13.9%	27.9%	0.58	1.12		967,680
2006	1,158,161	369,995	369,995	0.610	26.5%	8.3%	14.1%	1.51	2.48		1,397,569
2007	1,799,657	484,760	487,829	0.660	27.9%	9.3%	15.9%	1.03	1.56	0.02	1,751,164
2008	2,301,500	595,319	499,200	0.780	22.8%	8.6%	14.6%	0.12	0.15		2,185,157

My study on rights issuance is, normally the price will fall after a rights issuance as dilution of EPS is relatively high. Unfortunately, Celestial has gone to this step is due to the Convertible bonds that are due coming June/July 2009. They can choose to finance a loan to service this CB payouts, but most likely, they are using this rights issuance to raise capital to prepare for a full payment if all the bond holders decide to bail out.

There's no win-win situation definitely, as you take a loan, you pay interest rates that may kill you, or you issue rights and dilute the earnings per share. My prediction (personal opinion) is that, once this CB saga is over and the company is more less back on the right track, they may do a reverse stock spilt again to reconsolidate the available shares on the market, depending on the number of rights issued.