Investing is more like tennis or golf than most want to realize.
For the non-golfers and tennis haters out there, here’s what I’m talking about…
Most sports are all about offence. You want to score more goals than the other team. But tennis and golf are a little different. Elite tennis players and golfers pick their points of attack, choosing instead to focus on minimizing mistakes.
This approach can be easily compared to investing. Investors like to focus on their winners, saying that one great stock can make a whole portfolio. But we must also pay attention to the losers, since stocks can always go down. The last thing any portfolio needs is a stock going to zero.
If you stick to blue-chip stocks, the chances of a company going out of business is relatively small. But many solid stocks suffer from dead money syndrome. These stocks simply sit there for years, slowly bleeding away investor capital as they shrink. These kinds of companies can also be extremely hazardous to your portfolio.
Let’s take a closer look at three of these companies, Canadian stocks I’d be selling immediately if I owned them.
IGM Financial (TSX:IGM) is rapidly being surpassed by upstart competition, a trend that doesn’t look like it’ll reverse itself anytime soon.
You likely know IGM better as Investors Group. The company is one of Canada’s largest mutual fund managers with some 5,000 representatives across Canada.
Astute investors already know the issue with Investors Group. The company’s agents recommend high priced mutual funds, often with fees of 2% or more. Low cost exchange traded funds (ETFs) are the much better choice; they often cost 0.2% or lower. That’s a 90% savings right there.
IGM has attempted to stem this trend by expanding into wealth management for high-net worth clients. This is a highly competitive field that’s already dominated by Canada’s largest banks. I don’t think this is a long-term winning strategy.
E-L Financial (TSX:ELF) is a little-known life insurance company that persistently trades at a massive discount to the sum of its parts. Shares trade hands at $693 each as I write this; book value is closer to $1,000 per share.
E-L bulls are convinced the gap between book value and market value will inevitably close in their favour, but I disagree. The company’s ownership structure is complex with several different subsidiaries at different ownership levels. The Jackman family controls everything, which actively discourages activist shareholders who could advocate for a break-up of the company.
Simply put, there sure doesn’t look like any near-term catalysts that will help the company’s shares go higher. The underlying insurance operations should post decent results, but investors can easily buy life insurance companies without all the complexity E-L offers. Heck, you’re not even paid handsomely to wait. E-L Financial sports a disappointing 0.7% dividend yield.
Many investors are fans of Knight Therapeutics (TSX:GUD) because of the CEO, Jonathan Goodman. You might remember that Goodman was the man credited for turning Paladin into a multi-billion dollar enterprise before it was acquired.
Goodman supporters are convinced Knight can pull off a similar coup, but I’m skeptical. The man was in a serious bike accident a few years ago and he’s never really been the same since. He has short-term memory issues as well. But he’s the largest shareholder, so whatever he says, goes.
Knight has also been accused of sitting on mountains of cash and not really doing anything with it. Goodman says the company is just being patient and waiting for the right deal. Skeptics say the company needs to put more cash to work. As it stands today, Knight’s market cap is $923 million. At the end of its most recent quarter, the company had more than $530 million on its balance sheet. Shares also trade at approximately 70x next year’s projected earnings.
Will Goodman put the cash to work wisely? That’s a big risk, something I wouldn’t stick around to find out.
The bottom line
Investors must remember that playing good defence is an important part of the process. It’s a good thing to be patient and give companies time to work out their problems. But sometimes, things aren’t poised to get better. These are the stocks you should avoid.