Bad Houses in Bad Neighborhoods: Four Stocks for Investors to Avoid

Everybody loves a good house in a good neighborhood. And some people can make do with a good house in a bad neighborhood. But nobody is interested in a bad house in a bad neighborhood. And bad houses in bad neighborhoods might be the best metaphor for today's four stocks investors should avoid.

In the same way that we encourage investors to look for the best stocks in the best industries, we also warn investors to steer clear of the worst stocks in the worst industries. From a PowerRatings perspective, the "worst" stocks are those that are less likely than the average stock to be higher in a year's time, and more likely to underperform the average stock. These are the stocks that get the lower PowerRatings of 3, 2, or even 1, and are the stocks we suggest investors avoid.

Of the four stocks on our "stocks to stay away from" listing, none of the names -- if not the industries to which the stocks belong -- should come as a surprise to investors. Some industries have been perennially difficult places for investors to invest -- we feature a stock from just such an industry here. Other industries have gone from boom to bust, rising from a relatively overlooked industry group to being one of the most sought-after destinations for stock investors, and then ultimately to ruin as the industries failed to live up to ever-higher expectations. Three of the four stocks fit into this group. And that is as good as place to start as any.

Beazer Homes USA (BZH@BZH | Quote | Chart | News | PowerRating) and WCI Communities (WCI@WCI | Quote | Chart | News | PowerRating) both have PowerRatings of 1. Stocks with PowerRatings of 1 are among the worst opportunities for investors in terms of both reliability and performance. Our research, based on thousands and thousands of simulated trades between 1995 and 2006, revealed that 1-rated stocks have been higher one year later less than 35% of the time. Compare this to the average stock, which has been higher one year later as much as 67% of the time.

Stocks with PowerRatings of 1 have also been poor performers. In our entire 10-point rating system, only stocks with PowerRatings of 1 have historically provided negative returns after a year. Specifically, we found that 1-rated stocks tended to lose, on average, more than 5% in a year's time.

And if their own low PowerRatings were not enough, both Beazer Homes USA and WCI Communities belong to the Residential Construction industry, an industry with the lowest possible PowerRating of 1. Industries with PowerRatings of 1 have provided investors with average annualized returns of negative 2.31% since 1995. The average industry, by contrast, has provided average annualized returns of approximately 14.61% over the same time period.

Indeed, low PowerRatings stocks and low PowerRatings industries are truly a lethal combination when it comes to investing.

Beazer Homes USA is trading much closer to its 52-week price low of $4.53 than its 52-week price high of $43.50. For its part, WCI Communities is trading very close to its 52-week price range from a high of $24.20 to a low of $1.35.

MGIC Investments Corporation (MTG@MTG | Quote | Chart | News | PowerRating) is another stock with a PowerRating of 1. MGIC Investments Corporation belongs to the Surety & Title Insurance industry, along with a host of other low PowerRating stocks such as Ambac Financial Group (ABK@ABK | Quote | Chart | News | PowerRating) and MBIA Inc. (MBI@MBI | Quote | Chart | News | PowerRating), both with PowerRatings of 2.

Unfortunately for these stocks, the Surety & Title Insurance industry is one of the lower rated industries in terms of PowerRating that investors could choose stocks from. With its industry PowerRating of 2, the Surety & Title Insurance industry is expected to underperform the average industry -- potentially by a significant margin. Compared to the average industry, which has produced returns of approximately 14.61%, industries with PowerRatings of 2 have produced average annualized returns of 5.97% from 1995-2006.

MGIC has a P/E of 21.30. The stock is trading in the lower half of its 52-week price range from a high of $2.92 to a low of $1.47.

Our last stock to avoid hails from the Major Airlines industry, which has a low industry PowerRating of 2. UAL Corporation, with its PowerRating of 1, shares the Major Airlines industry with a number of similarly low-rated stocks, such as Continental Airlines (CAL@CAL | Quote | Chart | News | PowerRating) with its PowerRating of 3 and US Airways Group (LCC@LCC | Quote | Chart | News | PowerRating) with its PowerRating of 2. UAL Corporation has the dubious distinction of being the lowest rated stock in the group.

UAL Corporation has a P/E of 13.10. The stock is trading in the lower half of its 52-week price range from a high of $51.60 to a low of $23.53.

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