Commonwealth Bank of Australia (ASX: CBA), Challenger Ltd (ASX: CGF), G8 Education Ltd (ASX: GEM) and BHP Billiton Limited (ASX: BHP) are 4 blue chip dividend shares on my AVOID watchlist.
What does 'avoid' mean?
The dictionary definition of avoid is, "keep away from or stop oneself from doing something"
To my mind, when I'm investing that does not mean 'sell', 'hold' or 'buy'. Avoid means, 'just don't go there today'.
Commonwealth Bank
Commonwealth Bank shares make it onto my avoid watchlist for no other reason than valuation. For someone who is looking for bargains, I think it is a little too expensive. If the CBA share price was below $75 it would probably be on my 'buy' list because I think it is a great business. I just don't think it's a great investment — today.
Challenger
Challenger could go on to be a fantastic investment. And I should say that I held shares in Challenger when its share price was less than half of what it is today. Maybe I'm a little upset I didn't hold on. But I don't think so.
Challenger is Australia's largest provider of annuities, which are kind of like a term deposit that you buy with your retirement savings. Challenger takes the money, invests it and gives a retiree a fixed return. Basically, they take the risk of investing the money and pay the retiree a fixed sum.
I sold my Challenger shares because I realised I really had no idea how everything came together, if the assumptions used in the investment portfolio were correct or how long-term trends would affect the business.
It's like if you ask me to fix your Ferrari, I'd probably take one look under the hood and run away. But give me your '92 Toyota Corolla and I'd take care of it. As Warren Buffett says, you should know your circle of competence, and as Peter Lynch said, 'know what you own and why you own it'.
As an aside, I couldn't tell you what the CBA share price will be tomorrow with any certainty — can Challenger predict where bond yields will be in 15 years?
I'll admit I could be completely off the mark with Challenger — here is another take on the company.
G8 Education
Similar to Challenger, I think an investment in G8 Education shares is a classic case of 'be there for a good time, not a long time'. To add some beat to that rhyme, 'it's all good until the music stops'.
G8 Education's business model is what we finance geeks call a 'roll up'. It has gotten bigger by buying other companies. The idea is simple: take on debt at low levels or issue shares at high prices, either way, you get a lot of cash on your balance sheet; then, buy childcare centres in the private market.
Basically, G8 Education buys a cheap asset (a private childcare centre), using debt or shareholder money, and adds that asset to its existing group of centres. What happens next is the fun part.
The market thinks, 'oh, wow! G8 Education is growing'. Of course, it is. They are buying a cheap asset and immediately making it more expensive when it hits the public market. But you are paying for it.
Childcare centres make money, too. So I'm not implying this is another Ponzi scheme. All I'm saying is that I don't think it has any competitive advantage. Its only real advantage is it buys 'premium' centres in good locations. But there's a chance it is also caught between a rock and a hard place. The government could change how much child care it pays for, the number of children per room, etc. On the other hand, parents expect more for less. And if prices rise too high, they'll take their kids elsewhere.
BHP Billiton
The BHP share price has rallied 60% over the past year. That's pretty darn impressive for a $126 billion company. That's the kind of return you'd expect from a high-risk stock. And you would be right to think that. BHP is high-risk.
Despite its size, it is highly volatile because it is dependent on things outside its control.
Sure, it has proved you can make a mint by digging things out of the ground and shipping it to China. And it probably would be a buy at the right price. But at the current BHP share price, I think the risk of a falling share price is growing.
I'd prefer to buy shares in companies that can control the price of their products. For the record, given BHP's diversification, I'd buy its shares before Fortescue Metals Group Limited (ASX: FMG), who mines only iron ore. Fortunately, we're not forced to choose 'the best of a bad bunch', since there are over 2,000 companies on the ASX.
