A widely-read fund manager this morning published a list of companies his machine learning algorithms had identified as risks that could blow up in shareholders' faces. I thought it was an interesting list, and was inspired to come up with a few of my own:
Virgin Australia Holdings Ltd (ASX: VAH)
If you look at a 10-year price chart of Virgin shares it will tell you everything you need to know about this company's prospects. Virgin has struggled to remain profitable for most of its history, and even now that fuel prices are low – a big tailwind – the company is finding it hard to generate returns for shareholders. Virgin looks like the kind of business that is better owned by somebody else.
Genworth Mortgage Insurance Australia (ASX: GMA)
Genworth is a company that I had a good look at from a value investing perspective, because of the company's solid pile of assets and low price. However, the devil is in the details and I think that it is tough for shareholders to figure out the risks carried in the company's policies. On the face of it, Genworth's insurance portfolio looks safe, with an average LVR of around 56% and only 5% of loans are 'low-doc'.
However, the probable maximum loss of the Genworth portfolio is more than $2 billion, and it only takes a small percentage of policies going bad to wipe out profits and eat into the company's assets. Then there's the ease of calculating the likelihood of mortgages entering arrears, from a Reserve Bank publication:
Simple! (Ha.) It makes more sense if you read the rest of the document, but Genworth still belongs in the too-hard basket. You can't get access to the data you would need to make an informed decision about the likelihood of policies going bad, and accordingly, in my opinion, shareholders don't really know the types of risks they are taking. I'd leave Genworth on the shelf for the time being.
Pot stocks
As fool.com.au contributors have written ad nauseam the past few weeks, pot stocks appear highly risky. There are a couple I've looked at, like Auscann Group Holdings Ltd (ASX: AC8) that appear to have an eye to conserving cash to fund their long-term ambitions in the sector. This is not to say that these companies are outstanding investments, only that they could prove less bad than the rest of the sector. There are a few others that appear self-interested, with high executive salaries, and a few like Stemcell United Ltd (ASX: SCU) and Queensland Bauxite Ltd (ASX: QBL) that look like pure opportunists that will likely use their recently-elevated share price to raise capital soon.
Ultimately I would avoid all of the above companies today, as very few of them look like the type that an enterprising reader could use to safeguard their retirement.
