What's The One Share You'd Never Buy?

Published in Investing on 25 July 2011

Is there one company whose shares you'd never put in your portfolio?

Last week, I took a look "The 6 Best Shares On The Market" according to Foolish readers. As part of the ensuing debate, poster "eccyman" commented: "The exercise was an interesting exercise in crowd-sourcing. How about a similar exercise for one share you'd never buy?" So here we are.

It seems to me the reasons for rejection of companies can be split into two distinct categories; moral and investment-based.

Saying no on moral grounds

Some of the rejections may be obvious. Ethical and socially responsible investment funds invest in companies with social, moral or environmentally responsible agendas -- generally rejecting companies involved in alcohol, tobacco, gambling and defence.

If you agree with these principles, then you wouldn't touch tobacco companies such as British American Tobacco (LSE: BATS) or Imperial Tobacco (LSE: IMT). And purveyors of alcohol, such as Guinness-maker, Diageo (LSE: DGE) and multi-brand beer-maker SABMiller (LSE: SAB) would be out.

A whole host of defence companies would also get the heave-ho, including companies like BAE Systems (LSE: BA), while bookmakers and gambling sites like Ladbrokes (LSE: LAD) William Hill (LSE: WMH) are no-nos.

To make things really complicated, there are the supply chains of companies which some people may have objections to, or the deals they do with certain dodgy regimes around the world. In other words, there is the potential for rejection on too many grounds to go into in detail with too many companies.

Then there are a whole host of personal / "moral" decisions specific to individuals. For example, I have an investing friend who is a Manchester City fan who eschews Vodafone (LSE: VOD) purely because they used to sponsor City's neighbours.

Investment-based rejections

The trouble with such moral decisions is they're complicated and full of contradictions.

Personally, I'm not aware of any share I would never buy in relation to what a company actually does (though that could change if new information came to light about bad employment practices, for example). But there are plenty I wouldn't touch for other reasons.

1. Hall of shame

I have my own blacklist of companies and people to avoid as a checklist before even thinking about investing.

These I can't share with you for fear of libel. There are some people who haven't done anything illegal I'm aware of -- but whose involvement in any way whatsoever writes a company off for me. I think the personal blacklist is a sound idea for private investors. 

2. Blue-sky / growth

Never say never, but generally I avoid blue-sky companies these days and prefer not to have to pay for growth. But former growth stars that have fallen back to cash levels, usually just as they're about to get interesting, are something else.

As an example, renewable energy hydrogen specialist ACTA's (LSE: ACTA) valuation was more than doubly accounted for by its cash holdings a couple of years ago, and the shares grew 10-fold at one point.

Companies can become a combination of value and growth, i.e. GARP -- growth at a reasonable price.

3. No divi no buy?

If I'd always followed the "no divi, no buy" rule I believe I'd be a wealthier man today. A dividend helps indicate that profits are real.

But again, it isn't a matter of "never" so much as "seldom" these days for me.

4. Don't buy what you don't understand

"Don't buy what you don't understand" or don't invest in anything you can't draw with a crayon or explain to a child etc. are all ways of saying the same thing. 

I don't think you always have to understand the technology, or the business itself in detail. But if you don't, and you don't understand the numbers either, don't invest!

I'm sorry I haven't answered my own question here. But I don't know of a single share I'd never buy if its circumstances changed to make it compelling value, for example.

What do you think? Let us know in the comments box below...

More from David Holding:

> The Motley Fool owns shares in BAE Systems.

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Comments

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growingmyown 25 Jul 2011 , 9:14am

I think I would take the Charlie Munger advice and invert the criteria I use when picking shares I want to buy:

In no particular order:

1) company operating in a declining sector
2) earnings dropping like a stone
3) incompetent management track record
4) shaky accounting practices
5) falling dividends
6) adverse change in cash flow
7) lots of adverse publicity from campaigners
8) low barriers to entry
9) company with no pricing power
10) history of not meeting expectations

The list goes on.......

Growing My Own

AleisterCrowley 25 Jul 2011 , 10:59am

Anything 'fashion' based (SuperGroup?)

Yell

Bookies

mcturra2000 25 Jul 2011 , 11:27am
SmudgeButt 25 Jul 2011 , 12:08pm

It can be so hard to be an ethical investor and hard to know where to draw the line. Easy when the company has a majority of their product in one line - like BAE, BAT etc. More difficult when a company is so multifaceted that it's hard to tell what it might be into.

I was looking at Associated British Foods (which I thought might be involved in the British food industry) and then heard it owns Primark which has been criticised (rightly or wrongly) for exploitation of third world (child?) labour. That it came as a surprise shows I hadn't done enough research and so I have not (yet) invested. And this season's ethically out of fashion company may reform itself and those that appear ethical may change their approach when they change their directors. Very difficult for the average person (i.e. ones like me that also work for a living) to keep on top of all these issues.

Excel35 25 Jul 2011 , 1:29pm

Id feel consious about buying any Palm Olive stocks. They are responsible for wiping out so much rain forest habitat around the world. All the benefits the rainforest provide to the planet as we know it are lost.
Not to mention the direct loss of animal and plant life, many of which become extinct. Who knows what natural sources for medicines and other uses some of these species may (jave had) have for us in the future.

liesarenocomfort 25 Jul 2011 , 1:42pm

Airlines -seconded.

Any gambling company.

Excel35 25 Jul 2011 , 3:20pm

i meant Palm Oil, not Palm Olive

salmo365 25 Jul 2011 , 4:29pm

Yell is a good call. Just no longer relevent in a internet world.

With regard to growingmyown's list, most of the items on the list can be changed or arrested. Some are current indicators or symptoms rather than the actual problem with the company.

Except number (1). If the market is declining, theres not alot the company can do.



lotontech 25 Jul 2011 , 5:01pm

Like you said in the article David, never say never ;-)

alphonsox 25 Jul 2011 , 5:49pm

How about "The company you work for"

if the company you work for goes under you loose your job, investing in the company shares means loosing your job and your savings. A double whammy just at the wrong time.

ukvalueinvestor 25 Jul 2011 , 8:50pm

Just to be contrarian I have a small amount of YELL.

Other than the odd speculative gamble (see YELL above) I think most companies are in my 'do not touch' list since I only want above average companies at below average prices.

I suppose generally the list I'd avoid would be companies that:

1. don't pay a dividend
2. aren't growing
3. have lots of debt
4. have very volatile histories
5. are highly cyclical

I don't think I'd ever say never to any particular company though since they might turn things around enough, or jettison the dodgy people, so that they became a worthwhile investment.

ukvalueinvestor.com

jaizan 25 Jul 2011 , 10:35pm

I also have a "no airlines" policy.

Airports good. Airlines bad.


HighbrowNick 26 Jul 2011 , 1:37pm

HMV- destroyed by the internet.

Actually a lot of business areas will be killed by the internet. Travel agents, book shops, the list goes on.

LeeJG 26 Jul 2011 , 2:25pm

HighbrowNick - agreed, their business models are out of date.

I have International New Media shares - but that was only £400 to use up my ISA allowance and really showed me the error of my ways - wave bye bye to most of that cash.

Lloyds made a loss but is a long term investment - more money may be winging its way into that investment next year. QED is another of my investments, you can't build virtual houses and then live in them yet (no TRON is not based on reality).

actiondan 26 Jul 2011 , 3:11pm

Monsanto - widely regarded as the most unethical (evil) company on the planet.

JeremyBosk 26 Jul 2011 , 6:22pm

Anything with Virgin in the name. I cannot stand Branson.

Any company whose principal business operates in a country run by criminal lunatics e.g. Zimbabwe, Saudi, Iran, Afghanistan, USA, Venezuela...

snoekie 26 Jul 2011 , 8:21pm

Generally I look for dividends from shares, but I hold a few (and have been buying more) that are not paying dividends, e.g. Lloyds (but I remain hopeful).

International Ferro Metals, a newcomer a couple of years ago and paid a maiden dividend and then took several dives and then we had the crashes and the basic ore price fell heavily, but seems to be recovering (also recently, at about 5 p lower, several directors bought in chunks).

And then there Lonrho, inherited when the original Lonrho broke up and the subsequent directors seemed to treat it as a milchkow. That changed several years ago and I was impressed by the changes wrought so I started buying in more and more and have hopes for 2013, (with a lot of luck, next year).

I am bound to say I have bought some AIM companies shares in the past who were not paying dividends, and since have gone up and now are paying dividends, except several punts. Still, quids in, overall on the punts on AIM.

PatienceGone 27 Jul 2011 , 1:11pm

Any company whose survival obviously and directly matters to a lot of voters, or which might be used by politicians to "rescue" another such.
I didn't buy into HBoS because I didn't like how they worked, I bought Lloyds because I did. HBoS then proved I was right and HMG stopped me getting the benefit.
Doesn't matter which country - "What happens to voters / powerbrokers if they turn out to be right and competitors very wrong?"

Benatar 27 Jul 2011 , 4:45pm

Brokers are forever phoning me up top try to get me to invest in the latest small company (for which they are often acting as principal - surprise surprise that means they have to offload the shares.)

I tell them simply. I will not invest in a company which is not profitable, nor in "speculative" sectors (oil exploration, mining exploration, bio research.) Give me a company that can prove it knows haow to make profits. I also tend to avoid "one trick" wonders. I prefer to see more than one product. (Some company owns a plantation of some wonder vegitiation in Sri Lanka - which is the answer to all green energy requirements - that's as maybe, but what happens if there is a bad harvest, or floods?) - Too vulnerable.

In bigger companies I have always avoided the tobacco companies, not for ethical reasons, but at some stage I am convinced they will be hit by lawsuit after lawsuit in the USA for killing people.

RoyalsWithCheese 28 Jul 2011 , 9:12pm

There is a Japanese company beginning with "M", they manufacture cars and aircon units amongst other things. They have stockpiled 100,000 tonnes of Bluefin tuna and will release them onto the open market when this fish is extinct. Personally I find this behaviour truly shocking and totally unacceptable, I could never invest in this company or even purchase any of their products

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