Billionaire investor Warren Buffett once proposed the following rules for the stock market: “Rule No. 1: Never lose money. Rule No. 2: Never forget rule #1.”
In my 37 years of investing, I have broken these rules frequently. But by following Buffett’s Rule No. 1, I’ve been able to avoid some terrible business deals. For example, here are two companies I would like to avoid today.
1. Inflated ratings
Former US President Donald Trump currently has a business listed on the stock market. Trump Media & Technology Group Corporation (NASDAQ: DJT). The group went public on March 26, 2024 after merging with a listed special acquisition company.
Mr. Trump owns 57.6% of the social media company, so buyers of the company’s stock tend to be his most ardent fans. However, I am uncomfortable with this businessman and his actions.
Even putting my doubts about Trump aside, this group looks like a dumpster fire with a laughable valuation. In its latest full-year results, TMTG posted a loss of $58.2 million on revenue of $4.1 million. To me, this seems like a surefire path to failure.
The “Trump Up” stock reached an opening day high of $79.38, but has since fallen sharply. On Monday, April 15th, the stock had a low of $26.25 and closed at $26.61, down 66.9% from its high. Even after this bankruptcy, TMTG is valued at $3.6 billion.
There was no compelling reason to buy stock in a company that was so overvalued. This meme stock is primarily a dream stock for die-hard Trump supporters. Frankly, I’m not going to buy into this latest example of “tulip mania.”
On balance, I could be wrong. The social media app “Trump Truth Social” could end up being the No. 1 platform for Republican voters. And there are a lot of them. Advertising and other revenues could soar and the business could grow to a multibillion-dollar valuation. But I doubt it!
2. Running-in with the regulator
The history of the stock market has taught me to avoid companies that get into trouble with regulators, especially in the financial sector. One company that has run counter to the supervisor’s behavior is a financial advice firm. st james place (LSE: STJ).
Founded in 1991, St. James’s Place advises customers on their financial needs, sells products and manages assets on their behalf. Throughout its history, the wealth management company has faced accusations of charging customers high, complex and opaque fees.
Between 2023 and 2024, the Financial Conduct Authority gave the company several “taps on the shoulder” and raised red flags about its business model. In July of last year, the company announced lower fees, and its stock price plummeted.
This stock market fall was followed in October when the FCA put pressure on the group to further review its fee structure and when the company revealed a one-off provision of £426 million for customer refunds. Stock prices continued to decline further in October.
SJP made a pre-tax profit of £504m in 2022, but the above issues resulted in a pre-tax loss of £4.5m in 2023. The company’s stock price plummeted 66.2% in one year and 64.1% in five years.
With its share price down more than three-quarters from its 2021 high, St James’s Place is a company in crisis. The company’s valuation has fallen to £2.2bn and its share price is at its lowest since late 2012.
Again, I could be wrong. The group may settle with her FCA and regain customer trust. This could increase revenue and improve tanker operations, but I wouldn’t bet on this outcome.
You want to avoid this post-2 stock market plague. appeared first on The Motley Fool UK Edition.
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Cliff Darcy has no position in any of the stocks mentioned. The views expressed on the companies mentioned in this article are those of the writer and may differ from official recommendations we make on subscription services such as Share Advisor, Hidden Winners, or Pro. At The Motley Fool, we believe that considering diverse insights makes us better investors.
The Motley Fool UK 2024
