Imagine that the stock market closed for five years and you could only buy one share to hold through that period. Would you be most comfortable with Barclays (LSE: BARC), Tesco (LSE: TSCO) or Unilever (LSE: ULVR)?
Whatever decision you make, maybe that’s how you should invest all the time. Unless we’re prepared to hold shares for the long-term, maybe we shouldn’t be holding them at all. I think this test is a good way to tease out the strength of conviction (or lack of it) that we really feel for the businesses underlying our shareholdings.
Big banks, big challenges
Barclays is the first firm I would rule out. Big banks face big challenges and I’m not prepared to risk holding them for five years without looking. The top risk arises from Barclays’ cyclicality. Banks’ profits rise and fall in line with unpredictable macro-economic cycles. That means shares in the sector are shooting up, plunging down, or marking time as the market compresses valuations in a vain attempt to iron out the effects of the cyclicality inherent in the sector.
The result of holding a bank like Barclays for a long time can be lacklustre total investment returns at best, but if we get the timing wrong, there’s danger of making a losing investment in the banks. On top of that, the entire sector faces a gathering disruptive challenge from financial technology-driven competitors and from up-and-coming challenger banks cherry-picking the juiciest parts of the industry. Then there are the regulatory headwinds blowing so hard and the apparent will of governments to cut down the big banks’ size so they can’t threaten the stability of the world’s financial system. All those things add up to a powerful reason to avoid the big London-listed banks.
A sector threatened
Supermarket chain Tesco doesn’t make the cut either. For years supermarkets such as Tesco had it good due to the fast-and-loose spending habits of the public, but last decade’s financial crisis put a stop to all that. Cash-strapped shoppers now try to make every penny count and that environment proved fertile for disruptive challenger operations Aldi and Lidl.
Together, Aldi and Lidl attract around 10.4% of the nation’s grocery spend and rising fast. I think that’s a real and growing threat to the traditional supermarkets capable of keeping them in retreat for years. I don’t believe in the long-term recovery potential of Tesco. The firm has a bloated store estate that could prove to be a liability as the company tries to manage its own contraction.
Tesco and the other big supermarket chains built their dominant positions when conditions were different and now many of their operating and sales methods don’t work as well. They’ll try to adapt, but selling groceries has always been a low-margin high-volume business with little to differentiate one operator from another — not the best of set-ups to base a recovery investment on.
Grinding it out
The company I would buy and forget for five years is Unilever. The firm’s brands in the fast-moving consumer goods space deliver lots of reliable cash flow as customers re-buy repeatedly. Come recession or boom, people need their essential cleaning, personal care and food products and my guess is that Unilever will keep grinding out and steadily expanding its offering for years to come.