To do well in the sharemarket, one simply needs to be attentive to the basics:

  • Is the company growing its revenue and earnings-per-share?
  • What about its past history of generating returns for shareholders?
  • Can you trust management to allocate capital effectively and hence grow shareholder wealth over time?

There’s a whole lot more to company analysis of course with a myriad number of ways to analyse the financial statements, study a company’s market opportunities and critically evaluate senior management compensation (for instance).

And then you have to buy well. That is, buy at a price that’s not too expensive relative to its earnings outlook.

Keeping it simple though, I’d attempt to become familiar with the above as a starting point before putting down any cold hard cash for my shares.

Based on the questions above, here are my two ASX-50 stocks to be avoided at all costs:

Santos Ltd (ASX: STO)

Santos has been a debacle for investors over the last three, five and ten years, although there’s been a nice bounce off the stock’s lows where the price has rallied 65% since its nadir of $2.46 back on 20 January this year.

This hardly makes it a good investment in my view though. The price has been smashed so hard it was inevitable that there’d be some bargain-hunting so it’s best to forget about the price and look at the company’s fundamentals.

Yes, it looks as though the company is forecast to return to profit over the next 1-3 years, but let’s look at what you’re getting for your cash if you buy the shares today: negative earnings (a net loss of $US1,104m for the half year to June), a company that has no control over the pricing of its key products (the production and sale of hydrocarbons both locally and overseas), and a CEO (Mr Kevin Gallagher) who is new to the role and has yet to prove he can turn this ship around.

Combine this with a compound annual growth rate (CAGR) of -28.81% over the last three years and -3.15% over the last ten years, and it’s going to take a lot for Mr Gallagher to show Santos can be considered investment-grade.

Even priced in the low $4s and despite recent stability in the oil price, there are just too many reasons to not own these shares in my opinion.

QBE Insurance Group Ltd (ASX: QBE)

At its most recent half yearly report for 2016, the market didn’t take too kindly to its results with the share price falling almost 9% on the day of their release.

Revenue slipped 1% and its net profit fell 46% to US$265m.

But this isn’t in the context of a one-off bad year in a sea of green over the last decade. What it is though is a continuation of a string of poor results since 2012 that are yet another blow to long-suffering shareholders (for those who still own the shares that is).

Similar to Santos, this company has an abysmal record over many years of generating shareholder ‘wealth’ with a CAGR of -11.18% over the last three years and -3.42% over the last ten years.

I’m not so sure about the CEO Mr John Neal either. He could have been slipped the ultimate hospital pass in taking over the reigns from Mr Frank O’Halloran back in 2012 as he fights to deal with the consequences of his predecessor’s empire building, or he has yet to get a solid grasp of the business.

Either way, I’m not holding shares in QBE.

Foolish bottom line

Both of these companies are suffering from severe mal-investment over the last decade (and beyond) and it’s going to take a lot more than a 1-3 year bounce in earnings for me to be able to rate these ‘blue-chip’ companies as investment grade.

The worst thing you can do is to buy these shares simply because they’re big names on the ASX and their shares have fallen a long way.

I actually think there’s another 10-20% downside for both of these companies’ share prices and until management can demonstrate a sustained improvement in business performance, your best bet is to look at other investment ideas instead.

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Motley Fool contributor Edward Vesely has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.