COMMENT
Ghastly Sectors To Avoid

By David Kuo (TMFDragon)
September 26, 2005

There are certain industries that seem to have a habit of losing shareholders' money. They don't deliberately set out to do so of course, but unfortunately they can't help it because of factors peculiar to their business. So, if you want to do well in the stock market, it pays to steer clear of these industries. Here are three I am wary of.

Football Clubs

The financial woes at football clubs stem from their urge to spend in order to win. As any football fan knows, money will not always guarantee trophies but it doesn't half give you a good run for your money.

Last year, around two-thirds of football clubs said they expected to lose money, and true to form they are having a good go at it. Only six of the fifteen quoted football clubs are expected to be in the black, but even then, three of those will just about break-even.

Football clubs have cited inflexible high wages as their main concern, but that has not stopped them from spending around 60% of their turnover on players' salaries. While there has been much finger wagging at a certain West London football club for the financial trouble within football, the systemic problems existed long before Roman Abromovich stepped onto the scene.

Tribal instinct has compounded the problems at football clubs. You only need to look at the many face-painted football fans to realise that irrational customer support will habitually stand in the way of rational business practice. Will Tottenham Hotspur (LSE: TTNM) ever merge with Ofex-listed Arsenal Holdings? Not in a million years!

Airlines

Airlines suffer from myriad of maladies of which the worst is high operational gearing. What this means is that even small changes in revenues can have a disproportionate effect on bottom-line profits because of the high operating costs.

Some budget airlines believe they have found a cure for high operational gearing through better yield management. In other words, they aim to maximise profits by selling the right seat to the right customer at the right time.

So far, companies such as EasyJet (LSE: EZJ) and Ryanair (LSE: RYA) have been able to sidestep problems faced by traditional flag carriers. What's more, they would probably have run less competitive operators ragged under perfect market conditions. However, the airline market is far from ideal with many inefficient state-run airlines being routinely propped up and bailed out by public money. This may be great for travellers but considerably less so for airline investors.

Fashion Retailers

If you don't know what's hot and what's not on the high street then investing in fashion retailers can be a recipe for disaster. In this cut-throat and uncompromising sector, profits are only as good as this season's collection.

Do you remember a time when Laura Ashley (LSE: ALY) was the darling of the high street? That was in 1985, but its frilly floral prints quickly give way to shoulder pads and power dressing. Today Laura Ashley is withering painfully on the vine. French Connection (LSE: FCCN) and Kookai, which is owned by Forminster (LSE: FORM), are other examples of fashion retailers that have fallen by the wayside. In fact, French Connection may ditch its iconic "FCUK" logo, after it recently reported a 68% slump in mid-year profits!

Fashion retailers suffer from three main problems: low barriers to entry, a continual build up of unsold inventory, and a need to regularly introduce new and stimulating products. Additionally, a lack of customer loyalty makes fashion retailers an unpredictable sector that can quickly turn this year's darling into next year's turnip.

There are times in any industry when money will be made. However, the sectors listed above have a knack of producing serial disappointers. So the easiest way of sorting the wheat from the chaff is to avoid the sector altogether.

> Sectors For Tomorrow's Market | Three Obviously Bad Businesses