2 big-name ASX stocks to avoid in 2015

The success of an investor's portfolio is just as reliant – if not more so – on the investments not made over time, as the actual investments made. For that reason, Commonwealth Bank of Australia (ASX:CBA) and Fortescue Metals Group Limited (ASX:FMG) should be avoided.

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The success of an investor's portfolio is just as reliant – if not more so – on the investments not made over time, as the actual investments made.

Often, it's not something that most investors think about. Their attention is focused solely on finding the big winners which can rapidly drive their portfolio higher, while they largely ignore the downside risks of other stocks which could potentially act as a weight on their portfolios.

Although the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) has struggled to gain traction this year, it is still sitting near a six-year high above the 5400 level. While there are still attractively priced stocks out there to capitalise on, they are becoming more difficult to find with many having become significantly overvalued.

2 companies to avoid in 2015

One such company is Commonwealth Bank of Australia (ASX: CBA). As Australia's second largest corporation – right behind mining behemoth BHP Billiton – Commonwealth Bank is a stock owned by most retail investors and almost every investment fund.

Given its perceived level of 'safety' and its lucrative, fully franked dividend yield, Commonwealth Bank has been a popular investment in recent years which has seen its share price skyrocket to record heights.

However, Commonwealth Bank is almost certainly a stock to be avoided in 2015.

As it stands, the bank's shares are trading on a P/E ratio of 15.4 times trailing earnings, which seems very excessive considering its limited growth prospects in the coming years. When the risks associated with Australia's inflated housing market, the high likelihood of stricter capital requirements and the possibility of stunted dividend growth are also taken into consideration, Commonwealth Bank's shares are very expensive right now, and could certainly decline in price over the coming 12 months.

Another company which is no doubt on the radar of investors is Fortescue Metals Group Limited (ASX: FMG), which is Australia's third largest iron ore miner. The miner's shares have been smashed this year as a result of the freefalling iron ore price, compounded by Fortescue's enormous debt load.

Fortescue's shares are currently changing hands for $2.87 per share, putting the stock on a trailing P/E ratio of just 3.1 times earnings. For a company with a market cap of $8.9 billion, you can see why investors would be interested.

However, just because the miner's shares have dropped more than 50% in price in 2014 doesn't mean they won't fall further. The iron ore price has fallen to a five-year low at US$70 a tonne, but experts believe it could drop below US$60 a tonne in the coming 12 months. Not only will that wreak havoc on Fortescue's margins, it will also impact its ability to repay its debt which could see the shares fall much, much further.

BRAND NEW: The Motley Fool's #1 Stock Pick for 2015

Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »