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While the investment community remains focused on discovering the next home run stock poised for 4-bagger returns, we think it is equally important to identify and avoid potential torpedo stocks that could blow up your portfolio. Thus, we cannot agree more with Warren Buffett’s famous basic rules of investing:

“Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.”

The table below provides a list of 15 large cap companies from the S&P 500 that we deem to be potential torpedoes. These are companies that rank poorly according to important criteria developed by The Applied Finance Group (AFG), including Economic Margin, Management Quality and Valuation Rank. These three criteria have proven through back-tests to identify stocks likely to underperform sector peers and benchmarks. If you own or are considering adding one of these companies to your client portfolios, you may want to take a closer look into these companies and reconsider whether or not they are worth adding/owning.

When creating our list of unattractive stocks we looked for companies that fit the following criteria.

• Unattractive valuations

• Expected to experience a decline in economic profitability

• Wealth-destroying management teams

AFG
Ticker Name Sector Investment Opportunity
15 S&P 500 Potential Torpedo Stocks
AYE ALLEGHENY ENERGY, INC. Utilities Unattractive
NOVL NOVELL INC Technology Unattractive
TYC TYCO INTERNATIONAL LTD. Consumer Durable Unattractive
LMT LOCKHEED MARTIN CORPORATION Capital Goods Unattractive
CTAS CINTAS CORPORATION Consumer Non Durable Unattractive
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JACOBS ENGINEERING GROUP INC Capital Goods Unattractive
XRAY
DENTSPLY INTERNATIONAL INCORPO Health Unattractive
DOW DOW CHEMICAL COMPANY (THE) Basic Material Unattractive
WIN WINDSTREAM CORPORATION Technology Unattractive
HOG HARLEY-DAVIDSON INCORPORATED Consumer Durable Unattractive
FO FORTUNE BRANDS, INC. Consumer Durable Unattractive
RHT RED HAT INCORPORATED Technology Unattractive
PBI PITNEY BOWES INC. Capital Goods Unattractive
AMD ADVANCED MICRO DEVICES, INC. Technology Unattractive
DF DEAN FOODS CO. Consumer Non Durable Unattractive
Source: 15 S&P Torpedo Stocks