Finology Research Desk has a clear view: Not every stock deserves a place in your portfolio. Plenty of them look great at first – rapid growth, big promises, glowing media coverage. But take a closer look, and warning signs start to show.
These stocks can quietly hurt your returns over the long run. That’s why picking the right stocks isn’t just about spotting winners. It’s also about knowing what to avoid, and why. So we’ve built our rulebook: a clear, no-compromise principle of what not to own.
Here’s what we deliberately avoid and why:
1. Companies that try to do it all
We stay away from companies that try to lead in every sector. When promoters believe they can do everything, they usually end up losing focus. Legendary investor Peter Lynch warned against this kind of over-diversification; he called it “diworsification.” It’s the opposite of smart diversification. Instead of reducing risk, it adds complexity, misallocates capital, and weakens the core business.
Such companies are hard to analyse, and even harder to predict. As investors, we prefer clarity and focus. So if a business keeps changing strategies, jumping into unrelated sectors, or shifting direction too often, it signals a lack of clarity.
In Finology 30, we pick focused businesses that lead in their sector. The result is clear: true portfolio-level diversification, built by choosing one strong, sector-leading company at a time.
Amtek Group is a classic example. Once a strong auto parts player, it lost direction in 2014 by acquiring Barista Coffee for ₹100 crore through its subsidiary, a move that made no strategic sense. At that time, Amtek was already struggling with debt, which had climbed from ₹15,000 crore in FY13 to ₹17,600 crore in FY14.
Instead of focusing on its core business, it poured money into a loss-making, unrelated venture. In 2015, the company defaulted on ₹800 crore worth of bonds and was forced to sell Barista and other assets to raise cash. By 2017, it went bankrupt, a direct result of rising debt and poor business focus.
We prefer businesses with focused promoters who solve one problem well, without distractions.
2. Companies that aren’t profitable
We avoid companies that aren’t profitable. That doesn’t mean every business must turn a profit from day one. Taking a few years is fine; there may be valid reasons, like heavy upfront investment or the need to reach scale in a low-margin industry. But lately, chasing growth without a clear path to profits has become the norm.
We believe in doing business the Zerodha or Zoho way: build with your capital, borrow less, and grow through real profits.
Sure, some businesses genuinely need heavy capital and have to raise funds; that’s fair. But with over 5,000 listed companies to choose from for Finology 30, we don’t compromise. We focus only on businesses that are profitable, use customer money to grow, and can stand on their own. That’s how we find 30 companies worth owning with confidence.
And even if a company is profitable, we avoid it if it can’t fund its operations. United Phosphorus Limited (UPL) is a classic example. In FY24, its profit dropped 60%, ending the year with a loss of ₹1,878 crore. EBITDA margins fell from 19% to 10%, and cash flows dried up.
By December 2024, it had to raise ₹3,378 crore through a rights issue to repay its debt, which stood at ₹23,939 crore in FY23. Despite years of reported profits, the business couldn’t sustain itself. High debt and rising costs kept draining cash.
That’s exactly the kind of risk we stay away from.
3. Public sector undertakings (PSUs)
We strictly avoid public sector undertakings. While the government’s role in sectors like healthcare, education, and law and order is critical, its involvement in running commercial enterprises such as airlines or a large number of banks may not always align with long-term economic efficiency.
We believe that one or two public banks are enough to ensure system stability. But when there are over 12, banks like SBI and Bank of Baroda end up competing with each other, instead of making the system stronger.
4. Companies that keep raising funds
We stay away from companies that raise money every few months through FPOs, rights issues, or QIPs. Frequent fundraising is a red flag, as it usually means the company is short on cash or its core business isn’t strong enough to fund growth on its own.
And here’s the bigger problem: every time they issue new shares, existing shareholders get diluted. Even if profits grow later, earnings per share stay low because those profits are spread across too many shares.
We prefer businesses that fund growth through internal cash flows. In those cases, profits aren’t just earned, they’re reinvested into the business, keeping it self-reliant.
Over time, consistent cash generation can even allow these companies to buy back shares, reducing the total share count. That means future profits are shared among fewer shareholders, which pushes up earnings per share and shows the company is focused on real value creation, not just growth for the sake of it.
5. Companies that rely too much on government contracts
We avoid companies that depend heavily on government contracts, where most of their revenue comes from B2G. In sectors like railways and infrastructure, the government is the dominant buyer. Multiple companies bid aggressively for the same order, leaving all the pricing power with the government.
On paper, these contracts may look lucrative. But the reality is different, margins are thin, payments are delayed for months, and a single policy change can throw everything off balance.
And it’s not just limited to government-facing businesses. The same problem shows up in any industry with too many sellers and too few buyers. In these situations, suppliers are stuck cutting costs, working with thin margins, and unable to raise prices.
That’s not the kind of company we want to invest in.
6. Companies that want to grow at any cost
We stay away from companies that chase growth at any cost. These are the ones that want to be everywhere: food delivery, quick commerce, AI, logistics, you name it.
But when you ask about net profit, they brush it off, because they’ve never made any. Instead, they point to EBITDA or operating profit. These numbers look better because they leave out key expenses like interest, depreciation, and taxes.
It gives a false impression that the company is profitable when, in reality, it’s not.
A few quarters later, when you ask again, they announce a new category where they plan to invest heavily for the next couple of years. And when questioned, they defend it by saying: “If we weren’t entering new segments, our older ones would have been profitable.” But those profits never show up.
The reality is, no company can win in every segment. One wrong move can undo years of progress. We’d rather invest in companies that lead in one segment, stay focused, and expand with clarity.
7. Companies with a political background
We avoid companies run by promoters with a political background. These businesses often grow quickly when their party is in power, thanks to easy contracts and fast-track approvals.
But that growth usually comes at a cost: under-the-table deals, misused influence and unfair advantages. And once the ruling party changes, the support vanishes, projects get delayed, and investigations often begin into how those contracts were awarded.
Political ties might fast-track growth for a while, but it’s usually short-lived and often built on corruption. And that’s the real concern. That’s not a risk we’re willing to take.
Conclusion
Markets are full of noise, big promises, flashy numbers, and constant hype. Investing is an art, and while some of these companies might still deliver returns, we are not willing to put your money at unnecessary risk.
That’s why we built Finology 30, a basket of 30 stocks built for investors who believe in long-term wealth creation and value a focused approach. These stocks are selected through rigorous filters that prioritise business quality, management integrity, and valuation discipline to appreciate and protect your capital.
Finology is a SEBI-registered investment advisor firm with registration number: INA000012218.Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
