The decision NOT to buy a stock is almost as important as the decision to buy one. Here are three big companies that won't be troubling my portfolio this year.
Making predictions is always difficult, particularly about investment sector swings. I correctly called the commodity downturn in 2014 and 2015, presciently selling my entire stake in BHP Billiton, but was taken completely by surprise when it sprang into manic life last year. The top five stocks on the FTSE 100 in 2016 all hailed from the mining sector, led by Anglo American(LSE: AAL), whose share price has risen an astonishing 319% over the last year.
At the risk of doubling down on my error, I can't see Anglo American maintaining this kind of momentum in 2017. Trading at 21.74 times earnings, it's no longer a potentially thrilling recovery play. There are already signs that its growth spurt is starting to plateau. Where it goes next depends on the global (and Chinese) economy, and global economic sentiment. Both are buoyant right now, with President Trump's inauguration less than a fortnight away. A Trump stimulus splurge would be good news for Anglo American, a Chinese trade war bad news. What will it get? After last year's crazy growth, I prefer to watch from the sidelines.
If you thought Anglo American was expensive, take a look at Paddy Power Betfair(LSE: PPB). It's now trading at 30 times earnings and yielding a less than compelling 2.04%. This is despite the fact that it was actually one of the worst performers on the FTSE 100 in 2016, ending the year in 95th place after falling 29%. Its recovery potential seems limited by its toppy valuation.
We saw today the rival William Hill is having problems, and I feel this sector could be in for a tough year too. Trading at 8,820p, Paddy Power Betfair is almost 20% below its 52-week high of 10,850p. You might see that as a turnaround play but I think that would be jumping the gun.
Education specialist Pearson(LSE: PSON) seems to have lost its identity after offloading the one part of the business everybody knew it for, its ownership of the Financial Times. It trades 33% lower than five years ago but the last 12 months have been kinder, with the stock creeping up 13% in that time.
Pearson is also one of the highest yielding stocks on the market, currently offering 6.34%, while its valuation is an easygoing 11.57%. Some may see this as an attractive buying opportunity, especially with a forecast 15% rise in earnings per share in 2017. It's also pursuing the time-honoured (and very popular in recent times) strategy of cutting costs and streamlining the business, which will help.
However, I view Pearson's growing debt with trepidation, as it more than doubled from £764m to £1.63bn over the last year, and there's no firm evidence that its shift to digital education will prove a winner. Of the three stocks, this would be top of my list, but I still feel the company's overhaul has further to go before it can really start delivering value to investors.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended Paddy Power Betfair. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.