 |
It’s common knowledge that to achieve the best overall return when managing your portfolio, you need to make the right picks at the right time. And you need to establish exit points so you know when it’s time to sell.
But you also need to keep losses to a minimum. So you must know what to totally avoid … be it an individual security or a whole sector. That philosophy has served me well when managing the Weiss Million-Dollar Ratings Portfolio. And it’s how I’ve been able to make money in such a troubled market environment.
The Ratings Portfolio is essentially a long-biased equity portfolio. And the Ratings help me decide whether, and how much, equity exposure to take in my Portfolio.
But it also helps me stay clear of stocks that are doomed for a downfall … even if others on Wall Street are buying them hand over fist.
And that’s my intent today: To give you some insight into a part of the Ratings Model analysis that exposes sell-Rated stocks.
How Accurate Has the Model
Been in Spotting Lemons?
Best Buy (BBY — Rated D) is a good example. Best Buy started off 2012 as a Buy-Rated issue. But on April 2, the Model downgraded it to Hold. Later in the year the Model issued a Sell Rating.
The market didn’t “want” to believe the deteriorating fundamentals and financial expectations, and pushed BBY higher during the first quarter.
But the Model never saw an opportunity where valuation versus fundamentals, or any other measure, warranted a serious second look at the stock.
Even news-driven moves in the stock — such as reports the company would be taken private and new consumer product introductions — could not sway the Model. It saw that the deteriorating fundamentals were not likely to recover any time soon.
Now BBY stands as a stock that is so speculative only specialists should consider playing it.
Currently the Ratings Model reveals that about a quarter of all stocks are probable minefields.
But …
Arch Coal (ACI — Rated D)
Really Stands Out to Me!
Here’s the second-largest coal producer in the U.S., and it’s rated Sell by the Ratings Model.
As a coal producer, Arch is beholden to a dwindling demand in its home country, the U.S., and a potentially unstable demand in developing countries. Domestic coal consumption has suffered here because of a glut of cheaper natural gas. And even if electric utilities claim they are switching back to coal-fired production due to rising gas prices, the impact of such changes are minimal.
In the future, we’ll likely burn less of those combustibles that poison our atmosphere, number one of which is coal. Developing countries will continue to boost demand. But the rate of decline we’ll eventually see there is likely to be far sharper than the one we’re experiencing here in the developed world.
So you can see that as a sector, coal is on its deathbed. Sure, there will be spikes in the price of stocks like ACI over the next year or so, as unwary investors get sucked into the notion that the rebound in the global economy is a pro-cyclical move.
However, analysts expect Arch Coal’s revenues and earnings to continue their recent declines. And I expect those declines to materialize next year.
Here’s why:
• We’re likely to have more and more natural gas hit the market, which will keep downward pressure on coal prices.
• Environmental regulations will become even more onerous for coal producers, and …
• Arch Coal lost $0.35 per share in 2012. For 2013, the loss is expected to swell to $0.75.
Energy is essential to the world’s economic future. But coal-fired energy is not!
And when you toss in the Model’s downgrade to Sell, the analytical community’s expected earnings decline, my fundamental analysis, and a little of common sense, you can understand why ACI is one stock you shouldn’t touch with a 10-foot pole.
Best wishes,
Don
