Anyone who enters the stock markets needs to understand it’s a win-some, lose-some game. Crystal ball owners excepted, investing is about making judgement calls on what might, or might not, happen in future.
But truth be told, success in the investment world is as much about where you don’t put your money as it is about where you do.
Here are some companies that I wouldn’t invest in and why. In each case it’s because I see something in the underlying business’ nature, or fundamentals, that makes long-term success unlikely.
This article isn’t personal advice. If you’re not sure if an investment is right for you, ask for financial advice. Investments can rise and fall in value, so you could get back less than you put in. Past performance isn’t a guide to the future.
Why I don’t invest in companies lacking pricing power
Around the time of the tech boom at the turn of the millennium, Vodafone was the UK’s most valuable company by far, valued at more than £200bn.
Given that cumulative profits over the last 25 years have amounted to less than a seventh of that, it’s little surprise that the stock is now worth a fraction of what it once was.
One of the biggest reasons is because mobile networks have little pricing power.
By and large, one network is much like another, and it’s your handset that defines your mobile experience, especially since Wi-Fi means we don’t have to use 5G as much.
Mobile operators have found it difficult to charge for the data they convey. So, operators lease surplus capacity to others, like Tesco, who then use the operator’s own network to compete against it. I see little reason that this will change.
In fact, there’s no real evidence of operators around the world achieving consistently high returns.
Businesses that lack pricing power rarely make good investments.
Why I don’t invest in companies where the odds of success are stacked against them
Little is more exciting in the stock market than backing exploration companies.
Whether they’re searching for gold, oil or exotic rare earths – the stories sound so tempting.
The problem is that before these things are proven commercial, the risks are frighteningly large.
Drill an oil well? That could be $100mn before we even get remotely near the target.
Develop a new mine in a poor nation desperate for investment? What happens if governments change their tax policies, or the gold seam turns out to be thinner than expected?
The simple truth is that the hit rate in these projects is not in your favour. You, the private investor, are all too often thousands of miles from the project’s location. The data you get to see on the project is the data that the company raising money to fund it chooses to show you.
The FTSE AIM Oil and Gas index is at its lowest point so far this century. That tells you all you need to know about how often these things work out.
If you want to invest in a natural resources business, make sure it’s a big one with plenty of cash flows, able to fund its own adventuring without having to tap shareholders first.
Why I don’t invest in companies that can’t absorb their risks
Too many people have already had a go at turning luxury fashion house Burberry around to make it a good idea to back the latest management team in my opinion.
The company sits in an uncomfortable place in the luxury sector. It’s origins in outerwear are just too functional. The brand has morphed and somersaulted over the years.
The latest creative vision for Burberry takes it back toward well-made coats that will keep you dry and then radiates out into more fashionable territory.
Meanwhile, Burberry as a business isn’t sure whether it will break even this year. It has around £1.4bn of debts and leases to service, while cash outflows rose more than tenfold in the last six months.
Fashion is always a risky business, and Burberry needs to reinvent its brand to appeal to a broader base of luxury customers.
To my eyes, investing in Burberry right now looks like an unaffordable luxury.
Maybe a bigger player will come along and snap them up, because larger companies can absorb the risks. But investing in the hope of being bailed out by a third party is all risk and no control.
Remember, this article isn’t a recommendation to buy, sell or hold any of the investments mentioned.
What types of companies do I invest in?
The HL Select team has a fundamental investing style. That means we focus entirely on the tangibles of what a company does, how it sustains its competitive position and how its industry and end markets are evolving.
We look for high-quality businesses with long-term growth potential. Companies with great products or services that customers keep coming back to and that are hard to copy. This gives them pricing power, which leads to high profit margins and strong cash flow.
Businesses that generate a lot of cash should always form the bedrock of a diversified shares portfolio. We particularly like businesses with regular or recurring revenues from products that clients can’t find somewhere else, compared to those that have to find new customers every day.
Ideally, we’re looking for businesses that have financial independence from banks and are able to continually reinvest in themselves to help maintain a competitive advantage over their peers.
The three HL Select funds focus on a small number of stocks with long-term growth potential. They’re all managed by a team of experts, who continually review and monitor the holdings with the aim of maximising returns.
The HL Select funds are run by Hargreaves Lansdown Fund Managers Ltd., part of the Hargreaves Lansdown Group.
Information provided about individual companies is our view as managers of the fund. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts from Bloomberg. They are not a reliable indicator of future performance. Yields are variable and not guaranteed. This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment.
This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.