4 Stocks to Avoid

William is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Successful investing stems from buying companies with sustainable competitive advantages and that produce needed products and services. Companies that don’t perform well include businesses that sell products and services that face their demise in short-term fads and obsolescence.  According to the book Buffettology by Mary Buffett and David Clark “commodity-type businesses” with many players in the marketplace and low barriers to entry also don’t perform well. Today I highlight 4 such companies:

Facebook (NASDAQ: FB), a social media website, meets both criteria for stocks to avoid.

Many companies compete in the social media arena. Examples include Google Circles, LinkedIn, Pinterest, and Twitter giving Facebook commodity status.

A successful investor thinks long term. Social fads dictate the direction of this entire industry. Remember when Myspace dominated the social media scene? I have my doubts as to Facebook’s ability to maintain its dominance longer than 5 years. Most likely people will move on to the next big social media website much like people moved from Myspace to Facebook.

Also on a side note, dilution presents a problem of epic proportions. Last quarter Facebook turned a loss due to stock compensation expenses. Yesterday’s IPO lockup expiration release made 804 million shares available for sale, creating a further drag on Facebook returns.

All in all, money invested in Facebook will most likely evaporate into dust after 5 years as red ink starts to pile up and competitors undercut them on advertising rates and lure bored users away.

Zynga (NASDAQ: ZNGA), an online video gaming site, is more of a fad than Facebook.

An investor should ask, “Can people and businesses survive without your company’s products?” For Zynga, the answer is a definitive yes. The world won’t come to a screeching halt without Zynga’s online games. Zynga monetizes the games by selling virtual products which people don’t have to buy to play.

Management turnover also presents a challenge for Zynga. Most recently Zynga lost its CFO David Wehner to Facebook. It looks like rats leaving a sinking ship from an outside investor’s viewpoint.

The vast majority of Zynga’s business comes through Facebook. When Facebook’s users begin their exodus to a more popular site and when the remaining users of Zynga decide the games are no longer “it” then its curtains for Zynga.

Chipmaker, AMD (NYSE: AMD) is a struggling business in the declining PC industry.

AMD chips and the personal computers that house them continue to decline due to the popularity of tablets. Neither AMD nor rival Intel has made inroads into the tablet market. AMD’S revenue and margins fell 10% and 14% respectively and it doesn’t expect demand to pick up for several quarters.

Even in the best of times AMD operated under Intel’s shadow.  AMD’s revenue in the most recent quarter stood at $1.2 billion versus Intel’s $13.5 billion.

AMD, and the next profiled company, Hewlett Packard (NYSE: HPQ) make products suffering from obsolescence. Investors thinking of the long term need to take this into consideration. AMD will most likely underperform the market.

Computer and peripheral maker, Hewlett-Packard lost revenue in all aspects of its business in the most recent earnings announcement.  PCs, printers, information technology, servers and software experienced sharp declines in revenue. Hewlett-Packard’s attempt in the tablet market failed miserably. Obsolescence chips away at its personal computers as people increasingly adopt tablets. Hewlett-Packard competes with many players such as Dell, Apple, and Lenovo.

Management turnover plagues this company. Current CEO Meg Whitman represents the 4th CEO in 6 years for Hewlett-Packard. Management turnover sends the signal that Hewlett-Packard will underperform.

Tech companies exist in an immensely competitive environment and in many cases they sell products and services dependent on fads that come and go. Social media companies such as Facebook take turns at being the head of the class. Top dog Myspace got supplanted by Facebook and another company will take Facebook’s place. Products made by technology companies such as AMD and Hewlett-Packard are succumbing to obsolescence. Avoid “commodity-type” companies that focus on fad based products and that have too much competition.

stockdissector has positions in Apple and intel. The Motley Fool owns shares of Facebook and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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