Avoiding the ASX potholes

Much of investing is not just about selecting the best stocks – it’s also about avoiding the ‘pothole’ stocks. After all, just one pothole stock can ruin the gains from the rest of your portfolio, if it crashes. Have several in your portfolio and your portfolio’s likely to end up without an undercarriage, on the footpath.

Back in February, I wrote two articles outlining my views on how to pick stocks that might be heading for trouble, here and here.

In the second article I mentioned four stocks that could potentially be heading for trouble. Let’s see where they have got to so far this year.

Transfield Services Limited (ASX: TSE) was trading at $2.42 when I wrote the second article. The company’s shares closed at $1.67 today, representing a fall of over 28%. Transfield has recently appointed a new CEO and has won a number of new contracts, but we are yet to see a significant improvement in the company’s financials.

Hills Holdings Limited (ASX: HIL) was trading at $1.16. The share price is now just 90 cents, a drop of over 20%. With a mish mash of divisions, including building, electronics and communications and lifestyle and sustainability, the company has recently announced a restructure in order to cut costs. Previous acquisitions (or ‘diworsifications’ according to Peter Lynch) will be written down and the company expects to incur over $100 million in impairments and restructuring charges. Whether this is a turnaround in the company’s fortunes, remains to be seen.

Gerard Lighting Group (ASX: GLG) was trading at 77 cents, but saw its share price fall to 69 cents, an 11% fall, before it received a takeover offer. I imagine shareholders were glad about that.

Qantas Airways Limited (ASX: QAN) was trading at $1.68 – the share price is now $1.34 – a 20% drop, although it fell to as low as 96 cents in June, as the company struggled with rising costs, and an international division that was bleeding money. It says a lot about an airline when the most profitable division is its frequent flyer program.

Over the same period, the S&P/ ASX 200 index (INDEX: ^XJO) (ASX: AXJO) has risen 4.7%, without considering dividends.

The Foolish bottom line

All three remaining companies are in the process of trying to turn around their businesses, by cutting costs, restructuring or simply getting new management in place. The problem is that some industries are just poor businesses, and no matter how fast management run, company economics don’t improve – and neither do returns to shareholders. We’ve yet to see if these three companies can  get back up off the floor, or be pummelled back down.

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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned. The Motley Fool’s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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