2 stocks to buy and half a dozen to avoid

The first rule of investing is to avoid losing money, after that everything should fall into place.

Tom Richardson

Tom is a holder of the CFA Society of the UK administered Investment Management Certificate (IMC) and has more than a decade's professional experience in the investment management industry in Australia and the UK. Tom now works as a writer and editor for TMF Australia and has two easy to remember rules of investing he likes to follow. Avoid overpaying for growth stocks and avoid paying at all for stocks that are cheap for a reason. Tom prefers growth investing over value investing and says it's not rocket science, just avoid overpaying for the best returns.

Published June 24, 2014 10:02 am AEST

When it comes to investing half the battle is to avoid losing money, start with the basics and with time on your side the returns should come. One excellent indicator of stocks to avoid due to negative sentiment is ASIC's report of daily short positions held on stocks traded on the ASX. The following six are relatively heavily shorted or facing strong headwinds, suggesting they may be best to avoid for now.

Boart Longyear Ltd. (ASX: BLY) had 9.33% of its outstanding stock sold short and with the mining pullback being evidenced by reduced capital expenditures from the big miners like BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) it faces a challenging outlook. Joining it is mining and construction services business Bradken Limited (ASX: BKN) with 7.70% of its stock shorted according to ASIC's most recent report.

Some may be surprised to see Cochlear Limited (ASX: COH) with 18.35% of its stock short sold by those betting competitive pressures from the likes of Swiss business Sonova take their toll on Cochlear's sales. Priced at $60.84, Cochlear sells on around 31 times projected earnings and looks a hold at those levels.

After a series of profit warnings from apparel retailers, it's no surprise that other retailers like Dick Smith Holdings Ltd (ASX: DSH) and Harvey Norman Holdings Limited (ASX: HVN) have 7.05% and 5.74% of their stock short sold respectively. Retailer Myer Holdings Ltd (ASX: MYR) has also been under pressure after delivering some soft sales numbers in the face of a fragmenting consumer market. The department store has 10.19% of its stock short sold as investors bet against its chances of executing a turnaround.

If you do have some spare cash you're looking to invest you may be better off looking to businesses building competitive advantages in growth industries. Both Carsales.Com Ltd (ASX: CRZ) and SEEK Limited (ASX: SEK) have captive audiences, digital tailwinds, and large offshore expansion opportunities. At $10.80 and selling for around 27 times projected earnings, Carsales looks the value pick. However, there may be one less known company offering far better value..

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