Foolish Special

[ December 14, 2000 ]

The Motley Fool Industry Focus 2001

The all-new Motley Fool Industry Focus 2001 is now available and could be just the thing to fill those stockings on Christmas morning (and for those with small feet, don't worry, we also have an electronic version that takes up a lot less space).

But what's it all about and why have we produced it?

We often hear it claimed that a company's fortunes owe everything to its actual long-term profitability and nothing to the sector in which it happens to be doing business. A telecommunications company with an annual earnings growth of, say, 20% per year should see its share price appreciate no more or no less than an insurance company with the same 20% annual earnings growth.

Over the very long term, that generalisation approaches truth. A company's long-term health does indeed rely on its ability to generate profits decade after decade, and it matters not a jot whether that lovely cash comes from providing Internet services or catching rats.

If all investors were always totally rational, markets were perfect, and earnings growth could be estimated accurately, then this "rule" would probably apply to the shorter term too. But it doesn't, and ignoring the sector or industry that a company operates in is usually not a good idea, for a number of reasons...

• Different industries carry different levels of risk and two companies with similar earnings estimates do not necessarily lend themselves to similar valuations. Companies' shares will be valued, other things being equal, on a combination of future earnings expectations and the risk associated with those expectations. Unlike the actual value of cash, risk is very definitely tied to the industry in which a company is operating. Which is the riskier investment: a mature, profitable supermarket like Tesco (LSE: TSCO) that is carefully diversifying into electronic retailing, or a high-flying new telecommunications supplier like Colt Telecom (LSE: CTM) that is spending billions in its bid to capture the lion's share of high profit, high bandwidth, business-related telecommunications services?

• Markets will average out to something pretty close to rational behaviour in the long term, but shorter periods (from as little as a few weeks to as long as several years) can show periods of serious irrationality, and that irrationality is frequently sector-based. Nobody who has followed the stock market over the course of the year 2000 can have failed to see the rapid rise and equally rapid fall in anything vaguely high tech, and the telecommunications and Internet sectors have seen far more boom and bust than is generally healthy. Such short term uncertainty is why, at the Fool, we like to focus on the long term -- because it is the most easily accessible way to avoid being burned by short-term unpredictability. But investors earlier this year who had a fair understanding of the nature and rational valuations of those telecommunications and Internet companies would have had a much better chance of steering clear of them at a time when so many of them were so highly overvalued.

• Understanding what you buy is a cornerstone of Foolish investing. Let's say you are looking at two companies, each with similar earnings predictions and with risk levels that are generally considered similar. One of them is in an industry that you understand very well (say, electronics component manufacture) and the other is in an industry that you know nothing about (let's say it's in biotechnology). Which of the two is likely to be the lower risk investment for you personally, the electronics company or the biotech? Which one do you have the better chance of analysing more accurately? It's easy really, isn't it?

If everyone had the mental capacity to absorb and understand all of the companies in all of the industries that make up today's global economy, then sector differentiation would matter little. But for the rest of us (i.e. everybody, really), we will do better if we invest in those industries that we understand the best and whose risk and reward characteristics best suit us personally.

So, for the second year running, the members of the Fool editorial team have chosen the sectors they know the best and have produced a set of in-depth analyses, making up the Motley Fool Industry Focus 2001.

Accompanying each sector report is a detailed analysis of one or more companies that we think could make interesting investment propositions for the coming twelve months and beyond. They're not "buy" or "sell" tips, of course, just objective scrutiny that you might like to use as a springboard for your own analysis and decisions.

That's 14 sectors, and 21 company investment ideas in total. For delivery and pricing details, check out the FoolMart. And if you get your order in by Friday 15th December, you'll get two updates during the year absolutely free.