The market sometimes creates buying opportunities when good quality stocks fall out of favour and are oversold. In such cases, investors can take advantage of the dip and buy.
However, just because a stock's share price has crashed doesn't necessarily make it a good buying opportunity. Here are three shares that investors might be tempted to buy but probably shouldn't:
- Domino's Pizza Enterprises Ltd. (ASX: DMP). Whilst its share price has declined by 30% over the last year, it might still have a lot further down to go. The company failed to meet its earnings target when it released its FY 2017 results which damaged market confidence that it can continue to grow as fast as previously indicated. With a price to earnings ratio of 32, there is still a significant amount of growth factored into its share price, but I'm always cautious when a company largely grows by acquisitions. It's no surprise that Domino's has been targeted by short sellers with 15% of its issued shares shorted.
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JB Hi-Fi Limited (
ASX: JBH) has seen its share price decline by almost 20% over the last year which may tempt investors looking for a bargain given its 24% return on equity. The much anticipated arrival of Amazon is expected to have a significant impact on JB Hi-Fi's low cost electronics business model and investors have responded by short selling 15% of its issued shares. Amazon will not completely destroy bricks-and-mortar retailers, but the uncertainty makes it far too risky to bet on JB Hi-Fi.
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Retail Food Group Limited (
ASX: RFG) has had a dramatic 34% decline in its share price over the last year and will surely be tempting given its 6.45% dividend yield. Despite this, RFG continues to attract short sellers with 13% of its issued shares sold short as investors question the competitiveness of its brands and the sustainability of its earnings.
Foolish takeaway
Just because a share price has fallen doesn't mean it can't fall further down. Whilst these companies have performed well in the past, their future might be a little less certain.
