If you're new to investing you might find all the different ratios involved in assessing whether a stock is good value quite confusing. That's why it's worth remembering a few simple rules to help you avoid some common mistakes made by everyday investors.
The first mistake to avoid is buying stocks because they appear cheap, either on basic valuation ratios, or versus historical prices. Don't conclude they're due for a turnaround as things can't get any worse. Stocks are always cheap for a reason and often will be in long-term decline.
The second mistake to avoid is paying too much for fast-growing companies, while this is a better mistake to make than the former, it is still one worth trying to avoid. If you're left underwater after buying a fast-growing stock you can always hold your breath and you'll likely come back up again given time. However, that situation is generally detrimental to strong returns and one to be avoided.
Some cheap looking shares investors might want to avoid include:
Metcash Limited (ASX: MTS) faces increased competitive pressure not just from traditional rivals like Woolworths Limited (ASX: WOW), but also new low-cost entrants onto the grocery scene such as German phenomenon Aldi and U.S. giant CostCo. While Metcash is working to execute a turnaround strategy, the overall outlook remains challenging.
Ten Network Holdings Limited (ASX: TEN) faces competition from free-to-air rivals Nine Entertainment Co Holdings Ltd (ASX: NEC) and Seven West Media Ltd (ASX: SVW). With an emphasis on the youth market, Channel Ten also faces online competition for the attention of its target audiences. All this suggests the long-term outlook for Channel Ten remains tough.
Some fast-growing businesses that investors might want to avoid for now include:
TPG Telecom Ltd (ASX: TPM) is a well run business with a decent outlook, but may struggle to justify its current valuation given the competitive and fast-evolving space in which it operates.
SEEK Limited (ASX: SEK) is a quality businesss with some impressively expanding international operations. However, it's priced to grow quickly at around 35.6x trailing earnings. That growth potential is partly based on its market share dominance in Australia.
However, that market share dominance may come under increasing threat from rival Linkedin and other disruptive digital media platforms. In which case the $17.61 price tag may appear to have got ahead of itself.
