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Whether it’s the FTSE 100 or the FTSE 250, some stocks that look attractive at first sight can turn out to be really bad investments. Recognising these is key to investing success.
Heading into 2025, there are a couple that stand out to me from the UK stock market. And while they could turn out well, there’s just too much risk for me to go anywhere near them with my own money.
Dividend trap
Vodafone (LSE:VOD) has lowered its dividend this year, but there’s still a yield of around 6% on offer. That’s not bad, but I think the unit economics for this business are quite ugly.
The company has around £28.5bn in property, plant, and equipment to maintain. And over the last 12 months, it has generated £3.7bn in operating income using those assets.
That’s not great and it’s the main reason I’m looking to stay away from the stock. Over the long term, I’m wary that inflation is going to mean the firm struggles to generate a decent return on its investments.
However, Vodafone received a big boost recently with the Competition and Markets Authority approving its proposed merger with Three. This might help improve the equation for investors in the future.
What the company needs to improve its returns is scale. Being able to reach more customers with its installed base of assets should help boost its profitability and the combined business might achieve this.
Despite this, I’m not interested in buying the stock for my portfolio. Talk of investing another £11bn into the UK’s 5g network before returns appear is enough to keep me firmly on the sidelines.
Value trap
At a price-to-earnings (P/E) ratio of 5, shares in FTSE 250 chemicals company Johnson Matthey (LSE:JMAT) look cheap. But the company is in a tricky position.
Its largest division is platinum group metals. And the biggest use for platinum is catalytic converters, which feature in internal combustion engines.
The group has been struggling with global car sales in a cyclical downturn. But the rise of electric vehicles – which seems gradual but inevitable – is potentially a bigger problem over the long term.
Declining businesses aren’t always bad investments. They can sometimes generate significant amounts of cash for shareholders as they wind down this shouldn’t be underestimated.
Earlier this year, Johnson Matthey divested its medical device components unit. And in addition to strengthening its balance sheet, it distributed a substantial amount to investors as dividends.
I’m sceptical of the firm’s ability to repeat this enough to generate a significant return for investors. That’s why I’m staying well away from the stock next year.
Addition by subtraction
Outperforming an index like the FTSE 100 or the FTSE 250 isn’t easy. But one way of trying to do this is by avoiding the stocks that are likely to do worse over time.
That’s part of my strategy with both Vodafone and Johnson Matthey. As I see it, there are better opportunities elsewhere and that’s where I’ll be focusing my attention in 2025.
