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Look out! 3 stocks to avoid

Sometimes you have to let nature run its course. This is true for stocks as well. The S&P/ASX 200 Index (ASXINDEX: XJO) has turned down since the start of September, giving back some of the gains and hoopla of the August reporting season.

Some companies have made a good start to the financial year, but below are three companies that I believe should be avoided right now.

Myer Holdings Ltd (ASX: MYR): Several months ago I wrote about Myer, asking the question whether it was time to pick up the beaten-down stock? I suggested to avoid it and it turned out that was correct. It slid even more when disappointing full year results came out. Rumours in the news said that Solomon Lew of Premier Investments Limited (ASX: PMV) might now be mulling over acquiring it. However, he would probably avoid it at this time, too. It would be better for him to either wait for signs of a recovery or further weakness and a lower share price.

Arrium Ltd (ASX: ARI): Having to raise capital when iron ore prices are sinking is not an enviable place to be. The iron ore miner and steel producer was raising iron ore production earlier, yet even higher sales volumes may not be enough when the spot price gets very close to Arrium’s estimated $80/tonne break-even price. The stock is now down 38% in the past two months. Smaller miners are getting squeezed by the lower Chinese demand. If lower iron ore prices persist, there could be more pain. Leave this stock alone.

Aurizon Holdings Ltd (ASX: AZJ): Aurizon is also in a soft spot. It is one of the biggest rail transport companies for hauling coal to port, but if coal is less in demand then Aurizon’s business could weaken. Also, it is pushing ahead with its plan to build a new 430km rail line to connect the Pilbara with its existing rail network in WA. It is working together with China’s Baosteel in a joint venture to develop the West Pilbara Iron Ore Project, which will be linked up to the ports by the proposed rail line. Personally, I think there are too many headwinds for a this company at the moment. This is better to watch from the sidelines.

The situations that these companies are in now have to be played out and it’s possible all of them could recover over time. As investors, though, we have to keep our focus on the returns we can plausibly achieve through the stock picking we do today.

For example, The Motley Fool’s top analyst, Scott Phillips, recently identified one cheap but growing ASX stock with a 6.7% grossed-up dividend yield which could be a standout buying opportunity now. If you’re interested in knowing its name, just on the link below, enter your email address and we’ll send you the FREE report on his top dividend stock idea for 2014 – 2015!

“The Motley Fool’s Top Dividend Stock for 2014-2015”

Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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