Holiday Cleaning! Disqualifying A Number of Green Screen Stocks

It's time for some holiday cleaning!

While the primary goal of the site is to highlight the truly great investment opportunities from the Green Screens, it is also helpful from time to time to purge the lists of stocks that we are not interested in.

It is also an instructive exercise. Both positive examples of great stocks (like in the Buy, Hold, and Watch Lists), and negative examples of companies that aren't as investable are helpful in sharpening the investing razor.

I haven't done this in a while so there are quite a few we're gonna send to recycling today! Let's begin...

Dexcom (DXCM)

Let's start with a stock that is in no way a "bad" company - Dexcom. Dexcom makes continuous glucose monitoring (CGM) devices for patients with diabetes. CGMs are a massive improvement over the traditional finger prick method, and the latest models can give you an instant reading right on your phone or smartwatch.

Given this convenience, it's no surprise Dexcom has been an outstanding growth stock, with a 5-year annual revenue growth rate of about 35%. The firm continues to grow sales at 20%+ annually. Additionally, there is a semblance of recurring revenue here, as the sensors in its devices are disposable and have to be replaced weekly.

So what's the issue here? Competition. Dexcom faces some big names - Abbott Labs and Medtronic being the two headliners. Also, while CGM is a wonderful technology, the market size isn't enormous - likely about $10 billion annually by the end of the decade. Finally, I've never liked the opaque pricing dynamics in the medical device market. This is not market pricing - this is what Medicare and insurance companies are willing to reimburse. Dexcom can and does make a superior device than its competitors, but if the health bureaucracy won't pay up for it, that really doesn't matter much.

A good company but a difficult investment, Dexcom gets a pass.

Several Oil & Gas Stocks

I took a look at the oil & gas sector earlier in the year and decided that - for the most part - these are not the kind of stocks we want to be considering for investment. Particularly the exploration and production (E&P), or "upstream", segment of the industry relies heavily on crude oil and natural gas prices for profitability. Unfortunately, those two factors are completely out of the companies' hands, making them quite volatile.

Given the rationale laid out in that previous article, we can eliminate Patterson-UTI Energy (PTEN), as well as Baytex Energy (BTE).

I'm going to leave DHT Holdings (DHT) in the list, as it operates in the midstream segment where revenues are more volume based than commodity price based. DHT has also been a pretty impressive performer over the last several years.

Regional Banks Inter & Co. and HDFC Bank

Similar to oil & gas, we did a deep dive on the regional banking sector late last year and the rationale still holds. While interest rates on mortgages and other loans have skyrocketed, deposit interest payouts have lagged - the average 5-year CD still pays out only 1.4% annually. The issue is that the "growth" being screened is based on an uncontrollable and volatile factor - the federal funds rate, which can be modified 8 times a year. We want sustainable, organic growth, not driven by unpredictable external factors. Organically, regional banks grow deposits at 2-3% annually (absent acquisitions).

Given this, we can go ahead and cross off Inter & Co. (INTR) and HDFC Bank (HDB). Looking back at that article from last December, where we crossed out 20 (!) banks, all of those except for one (GGAL) have since fallen out of being screened.

PRC Stocks

Following the pattern of the previous two sections, I've discussed in the past why stocks that do business solely within the People's Republic of China are not good fits for U.S. investors. I still believe this is the case - China's geopolitical tensions and authoritarian leadership structure creates too many unpredictable risks that we are just better off avoiding, no matter how enticing the business opportunity.

There is only one new PRC stock in the screens, and that is hotel operator Atour Lifestyle (ATAT). We're gonna pass on this one too.