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