With things like challenger Banks cutting into normal bank profits and their customer bases, as well as brick and mortar retail chains going bust and margins being cut due to online retailers like Amazon / Alibaba etc booming, I was interested to see what people view as “risky” or “dying” out sectors in the stock market that you would avoid completely and why?
For me, that’s tobacco companies such as Imperial Brands.
While I personally have a view on the impact of these companies, I can also see a future scenario where smoking (incl. e-cigarettes) would be severely restricted or even outlawed. The trend might make this regulatory shift easier: https://publichealthmatters.blog.gov.uk/2018/07/03/turning-the-tide-on-tobacco-smoking-in-england-hits-a-new-low/
That said, I haven’t seen data for Germany, but just having lived there, I was getting the impression the trend was the exact opposite! And I know some people love the company’s dividends.
I’m increasingly getting suspicious that retail is a thing of the past.
I used to think that, but now I’m fairly confident it won’t happen, at least in the next decade or two
(which probably means it will )
Funny enough I have some knowledge on the specific sector.
A few points on this specific shift towards their own “healthier” option before reading the article :
These are not normal e-liquid style e-cigarettes btw
a) They sell the product, e-cig refills and accessories (for cleaning etc) likely more margins
b) It’s as close as it can get to a cigarette
c) It lasts as long as a normal cigarette (so consumers will still buy the refills daily)
d) It’s healthier
e) It very likely costs less so bigger margins
f) regulatory “friendly”
g) less of a “bad” name
In the EU the product is going really well.
This is a move from Philip Morris so my guess others are also monitoring what is going on and some already have their own products in some markets.
Tobacco companies waited to see what would actually happen market share wise with e-cigarettes before making the leap, so for sure it was hurting their bottomlines.
Any industries I’m not interested in/ don’t understand
(I try to keep it simple)
shows smoking prevalence in developing countries
Loyal(addicted) customer base, high barriers to entry- prohibition/limitations on advertising and plain packaging. Pricing power-addicted customer base.
Overall, number of tobacco users will increase in future, largely due to developing countries. These countries may have little political will to tax tobacco highly or tackle smoking especially with some of the tactics used by big tobacco.
Great topic this, thanks for starting @JohnDoe.
My bear list contains:
The UK consumer spending trend is too far in favour of ecommerce now and continues in that direction. Factor in the underlying costs of running bricks and mortar stores (energy, rates, tax, staff etc) and I’m very bearish on this sector. Retailers that are exposed to highstreets are a must avoid for me at the moment. I make the distinction of UK retail as I believe US retail still has quite a lot of legs.
Fundamentally I think the growth years are behind them. Emerging market growth is slowing and the inevitable slew of regulation will hit the industry over the coming years. In the more developed markets the trends towards the ecig market have a number of headwinds including inevitable regulation, low margins and near non-existant brand loyalty. I’m not one of the believers that say the tobacco business is ‘dead’ but I can’t see any growth in it either - share prices may grow due to underlying EPS success but I doubt revenues will see large gains again.
The constant balance of demand vs kerosene prices makes this so unpredictable. Good sales dont necessarily translate into good earnings & the reverse is also true.
Spiraling costs of maintenance combined with regulatory pricing pressure makes utilities extremely difficult to back over the long term. Customers are generally unhappy, infrastructure is under-invested in & the regulators are taking more and more of an interest in the prices & levels of competition. Factor in the possibility (unlikely in my opinion) of a Corbyn Government and Nationalisation & it looks fairly bleak.
In simplest terms, the amount of rules and regulations make decent profits & returns fairly low. They will always be steady companies with low returns so I can understand the appeal of them but this is a move I’d make as I’m looking to retire. The ‘insurance cycle’ is at or near its peak too so its likely that premiums will start to come under pressure again soon. US Insurers on the other-hand look very attractive to me
They’ve always been too high risk for me but given most are built on cheap debt markets that are overdue a collapse. By ‘independant miners’ I mean companies that either run one mine or are exposed to a single type of natural resource - their fate is not in their own hands and they have no way of hedging their losses when they occur. I’m a slight hypocrite here though as I do own Evraz. My caveat in this sector is anything that is over-exposed to Cobalt, I can’t see demand waning for that anytime soon.
On the more positive side my bull list contains:
It’s slightly counter-intuitive given they are currently over exposed to any Brexit bad news but there is a lack of homes in our country & that trend is only likely to continue. I do believe that baby-boomer generation deaths will slow this trend but it will not reverse it. Short term the market is being killed by Brexit & the removal of ‘help to buy’ but these things are all noise in my opinion. The sector is generally in good shape and is growing (albeit slowly). There are some bad companies in this sector though, if companies don’t have a net cash position and a large landbank at this stage of the cycle I would avoid them.
Again probably quite counter intuitive but banks tend to outperform in times of rising interest rates and I believe rates will have to climb sooner rather than later. Most of the big banks have learned their lessons from the financial crisis and are generally in good shape too. The threat of ‘fintechs’ is a serious one, but its one that is likely to take away some of the liabilities (current account holders) rather than the assets (loans, cards, mortgage holders) so it is likely to make banks more profitable (assuming they can fund their own lending). Again there are some really bad plays in this sector so its not quite as simple as favouring the whole sector.
Cloud & Big Tech
Cloud based companies that have adopted the subscription model are a clear pick for me. Some of the big giants have built up entire ecosystems now that allow companies to move to the cloud, cut costs and increase productivity. In this sector you could play the infrastructure or software game and I think they’re both solid picks. I’m vary of debt though as a number of companies have over-acquired & could be hit hard if the underlying economy weakens. But overall we need more servers, more computing power and almost all sectors are ‘teching’ up in some way.
Chips & Semi's
Fundamentally following on from the last point, we need more chips and more powerful ones at that. Both CPU’s & GPU’s are required and certain companies are really leading the way in pushing computing power. AI & Machine Learning is the underlying play here but rather than go on the software side, I prefer the hardware side. This is also a better way of playing 5G in my opinion as the cost is largely fixed, the TelCo’s will not have much pricing power on 5G. The Crypto demand of 2018 is now over and that over supply will largely be out of the market & hopefully doesn’t return. But datacentres & devices are ever-growing areas of our lives that consumers and businesses alike moving towards, not away from.
I think only a fool would bet against Ecommerce. At the macro level Amazon has changed everything & every retailer is now being forced online, even the ones that don’t want to (Shop Direct). For small & medium ticket items the market is now wholly online and the growth is here too (larger purchases are still debatable). I tend to avoid actually going for the ecommerce companies directly though, I prefer other paths to the sector. My two favorites are transport/logistics/delivery as well as payments. Online payments is my preference and there are clear leaders here that are largely unmatched by the smaller players. Logistics is tough as there are ‘legacy’ businesses that bring the sector down but the more agile companies that have shifted to the ecomm model are really undervalued in my eyes.
Thankfully I managed to find a way to hide all of that for the sake of everybody’s sanity
Retail for me is going down the tubes. The world is going to be run from your mobile phone, signs are becoming even clearer this week with TopMan and TopShop agreeing a deal with ASOS to sell their products through an online firm.
Royal Mail i wouldn’t touch as I can’t see it lasting much longer with the rate of technology.
As for my bullish sectors it’s got to be AI, all the major car companies laying off thousands of staff in recent times with the jobs going to automation. Genetics will be the next huge medical industry having spoken to insiders and their forecasters, and the Electric Car industry I can see taking off massively in the next 5 years.
One I’m on the fence about the now is cannabis, but something I’ll at least research about having a punt on.
Interested to know why airlines and insurance are on your bear case?
I could rant about airlines all day, but I summarized my feelings as much as I could above - in short, the unpredictability of the industry drives me insane.
For Insurance…firstly its only UK, I think the US guys are looking strong. Secondly, I think they’re too constrained on the amount of cash/near-cash investments they HAVE to hold by law & this simply diminishes returns over the long term. But I have to make a distinction here that I don’t think the industry is in bad shape at all, they’re mostly fundamentally good companies I just believe that you’re basically buying a bond fund with underwriting risk attached - I’d rather just hold the bond fund.
I agree with most of that, not sure about UK homebuilders - I am quite negative on anything to do with property - its a massive bubble, especially in London. It also hinges on banks willing to give out mortgages, and big gov subsidising new build sales.
Any meat substitute companies has to be there, although its getting crowded quickly.
Cannabis sector (in Canada) looks promising, but it hinges on US Federal law changes before it can take off - and given their rather conservative gov - may be a while off.
Lastly, Chinese companies that replicate an existing US service - like Twitch, Netflix (Huya, iQiyi) - they have a strong moat as its a mostly closed market and still relatively new.
Also, gold, swiss franc or japanese yen.
** Fyi, I might be slightly pessimistic
Retail is heading in a bad way it feels. I’m staying clear of that for the moment. Also aviation doesn’t seem to be doing too great.