I firmly believe isolating stocks to avoid is just as important as choosing the right equities to buy when investing. With that in mind, here are three UK shares I plan to avoid at all costs.
UK shares to avoid
The first company on my list is doorstep lender Provident Financial (LSE: PFG). Ethical considerations aside, this lender has some severe problems. It’s currently dealing with a “flood” of complaints from borrowers who claim the business has misled them.
There were 10,000 complaints to the Financial Ombudsman Service in the second half of 2020. These claims cost the business £25m.
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While PFG is trying to work out a plan to deal with these issues, it’s also facing an investigation from the Financial Conduct Authority. These are two severe headaches for the firm, and they’re unlikely to go away anytime soon. Shareholders may have to foot the bill if claims exceed Provident’s resources.
That said, the group may turn things around. Its profitable Vanquis credit card and Moneybarn car finance operations are still performing well. If it can dispose of the doorstep lending issues and concentrate on these divisions, Provident’s fortunes could improve.
Despite this, I’m not planning to include the stock in my portfolio of UK shares any time soon.
Coronavirus lending
Funding Circle‘s (LSE: FCH) IPO in 2018 caused a stir in the City. The company aimed to revolutionise the lending market, connect borrowers and lenders directly, and remove the need for a bank in the middle.
Unfortunately, the firm hasn’t lived up to the hype. It’s consistently lost money since 2015.
However, unlike many UK shares, the group performed well in 2020. The firm’s involvement in the Covid support scheme helped it expand loans under management to a record £4.2bn. Despite this, the business made an operating loss of £106m for the year. Fee income rose 25% to £220m.
While management believes Funding Circle’s outlook is bright, I’m not convinced. If the firm hasn’t been able to make money in the past five years, when will it make money? If the group keeps losing money, sooner or later it’ll run out of cash. That’s why I plan to avoid the stock at all costs.
Still, the business could prove me wrong. If the economy roars back to health over the next few months and years, demand for borrowing on the group’s platform could explode.
With interest rates at bottom levels, savers may also be happy to deposit their money with the group. The company is also planning to launch new products over the next few months to help businesses acquire funds faster.
This could help Funding Circle make more loans, which would generate more fees, which may help the business earn a profit. In this scenario, the stock’s outlook would change entirely, in my view.
