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Now for today’s piece:

The 7 Industries I Won’t Invest In

Highlights

Introduction

I want to start off this article by sharing some of the things I look for in a long-term investment.

• A wide moat

• Consecutive years of dividend growth

• A recession-resistant business model

• Long-term industry tailwinds

For my full investment criteria, you can check out these 2 articles here and here.

I mention this because many of the companies in the industries I’m about to mention don’t have the characteristics I’m looking for.

Now with that being said, let's jump into the industries I don’t like long-term:

1. Automobile Makers

I don’t invest in automobile makers for a few reasons:

It’s a cyclical industry.

Cars tend to be bought much less during a recession. I don’t want to invest in companies that are cyclical and struggle during recessions.

It was not too long ago that General Motors and Chrysler needed to be bailed out during the 2008 financial crisis. I don’t like hinging my portfolio on companies that require bailouts if the going gets tough.

Fewer people are buying cars.

As of July 2022, it was reported that 57% of consumers have no intention of buying a new vehicle. It’s also reported that 21% of people earning between $100,000 and $150,000 are looking exclusively at used cars. Also, the rise of rideshare options like Uber and Lyft lead me to believe this trend of purchasing fewer cars will continue.

Automakers have little to no moat.

Outside of brand loyalty, there aren’t many reasons a consumer will continue buying from a specific brand. Cars in each price range typically have the same features so there’s not much separating them from a business standpoint.

Cars are commoditized.

It’s a fight to the bottom in pricing. Most car manufacturers will compete on pricing but I prefer to own businesses that are able to raise prices year after year.

I had one reader bring up Ferrari as a potential investment. I’d like to look into them because I view them more as a luxury goods company rather than a car company.

Most cars are commoditized and compete on price, Ferrari never has to compete on price and their core customer is not affected by recessions.

What I would invest in instead:

Instead, I would buy an auto parts company for exposure to this sector. The way I see it, why bet on a specific car company when you can invest in a company like Auto Zone or O’Reilly that supplies parts for all cars?

2. Media Companies

Fewer people are watching TV.

There’s never been a time in human history when there have been as many entertainment options as there are today.

In recent years, we have the rise of social media and gaming. TV consumption (especially at the network level) has been on the decline.

Research from Ofcom found that those aged 16 to 24 spend only 53 minutes watching broadcast TV.

In contrast, people over 65 spend roughly five and a half hours each day watching scheduled television.

Media is a messy industry with tons of acquisitions.

Much like the banking industry, media companies have been acquiring and merging for years now.

It's a messy process that racks up debt and hinges on whether or not the corporate culture of each business can mesh. (See: Succession)

I’m not a fan of companies that keep racking up debt to acquire other companies, it's a recipe that rarely amounts to more profit for shareholders.

Streaming is a bad business.

It’s becoming incredibly expensive to produce streaming content and it's eating into profits.

Through the first 3 quarters of 2022, Netflix was the only streaming company that posted profits.

I question the pricing power of these streaming businesses. I don’t believe they can raise subscription prices enough to offset the cost of creating their content. Raise fees too much and I think consumers will flock to other options.

Streaming companies are also dealing with high levels of churn:

3. Banks

I don’t want to rely on “too big to fail.”

I like to sleep well at night knowing I hold strong, stable businesses. Banks do not allow me to feel that way.

So far in 2023, we’ve seen 3 of the 4 biggest bank failures of all time. I do not want the feeling in the back of my mind that says the bank I hold might be next.

Usually, the argument I hear is that some banks like JP Morgan Chase and Wells Fargo are “too big to fail” meaning the government will save them in times of crisis.

But what happens if they don’t?

I don’t want my investing thesis to hinge on the government possibly saving the bank from its own bad decision-making.

It’s hard to find banks with competitive advantages.

Outside of the number of locations and assets under management, what truly makes one bank better than another?

The whole industry revolves around making investments, and how can I, an outside investor, tell which banks are making better investments?

There isn’t a bank with a wide enough moat that lets me feel comfortable holding it for the long term.

Banks require leverage to grow.

Banks use customer funds to invest and grow their business.

This spells disaster when there’s a bank run and depositors want their funds back as we saw with Silicon Valley Bank. This risk of insolvency is not something I want in my portfolio.

Banks also have to keep up with their projections and if a few investments don’t pan out, they may be more inclined to take riskier bets.

Banks are often buyout candidates.

The banking industry is full of mergers and acquisitions, and banks have been consolidating for quite some time.

Banks are often acquired very cheaply during times of distress and shareholders might not receive as much as they could’ve after an acquisition.

4. Airlines

No barrier to switching.

As a consumer, I don’t have much loyalty towards any particular airline. I generally just want the cheapest flight to where I’m going so I can spend more money on my experience while I’m there.

For those reasons, I pick whatever the cheapest flight is and I’m sure many others do the same. There’s not much stopping me or others from choosing different companies.

Airlines are not consistently profitable.

According to The International Air Transport Association (IATA), airline passengers are only expected to make $1.11 in net profit for the industry.

In the coming year, airlines are expected to post a small net profit of $4.7 billion—a 0.6% net profit margin.

They are also at the mercy of fuel prices which drastically affect each company’s bottom line.

Some air travel is essential, but demand for discretionary travel will subside if airlines hike ticket prices too high.

5. Cruises

Cruises are a discretionary purchase.

I want the companies I invest in to be able to recession-resistant. A recession is inevitably coming, and cruise trips will be among the first purchases that are cut out.

No barrier to switching.

Similarly to airlines, there isn’t much standing in a consumer’s way if they want to switch cruise lines. Most cruise lines offer the same amenities on board and travel to the same destinations.

Cruise lines are not consistently profitable.

2020 was a terrible year for cruises as the industry was shut down due to COVID.

Carnival, Royal Caribbean, and Norwegian cruise lines all posted quarterly losses in their latest reports.

Demand still hasn't rebounded fully from the pandemic, and the low-margin cruise industry might remain unprofitable for some time to come.

6. Cannabis

I don’t want my investing thesis to be based on legalization.

Legalization is the big catalyst for cannabis companies, and we’re unsure if or when that’s coming. Smart money will likely sell the news before retail investors get the chance

Will demand increase?

This is speculation but I feel like anyone who’s going to smoke cannabis already is whether they buy it legally or not. What is going to drive more people to smoke long-term? Cannabis companies primarily sell to recreational and medical dispensaries, so there would have to be a recreational uptick in usage or more medical prescriptions being handed out for an increase in users. I’m not sure what is going to drive growth over the long term.

Will people buy from cannabis companies?

The cannabis industry is always going to have to deal with illegal sales. From a consumer standpoint, why buy it from a company and spend more than buying it off of the street?

Some places even allow you to grow your own cannabis, which really affects the potential profitability of cannabis companies.

It’s incredibly hard to turn a profit.

Cannabis is a very fragmented industry, especially in the US.

It is not federally legalized and that causes a lot of difficulty for cannabis companies. They aren’t able to transport products across state lines, meaning all farms, factories, shipping, distribution, and consumption must be done within state borders.

It’s also expensive to raise capital as a cannabis business. There aren’t as many financing options available and due to the uncertainty involving legislation, these loans are often with higher interest.

7. Apparel

Consumer tastes switch too often.

Today, brands like Lululemon and Nike dominate the apparel landscape, but will that always be the case? Fashion trends change and it’s hard to imagine a brand keeping up with trends forever.

I found this video interesting, just look at how much shuffling there is when it comes to favored brands:

My one exception:

One exception I do have to this rule is LVMH. I haven’t bought shares yet, but I will when it reaches my buy zone. I know LVMH sells clothing but they also sell handbags, alcohol, and perfumes. They’ve diversified away from solely selling clothes which reduces the risk the business would incur if their apparel fell out of favor. I don’t think it will since their brands like Louis Vuitton, Birkenstock, and Tiffany’s have been popular for centuries.

Final Thoughts

The industries I’m about to mention are industries I personally don’t want to own long-term but it doesn’t mean you can’t invest in them.

Every investor has a different risk tolerance and might want to own companies that others don’t and that’s okay!

I may buy beat-up companies in these sectors as a value play by only using a small portion of my portfolio. The goal here would be to own these companies until they get back to “fair” value and then sell.

This is a much different approach than my usual buy-and-hold strategy, which is why I only allocate a small percentage of my money to this strategy.

I hope this list helped you identify some things to look for when investing in different sectors.

Until next time,

Dr. Dividend

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