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Why it’s crazy to buy BHP Billiton plc, J Sainsbury plc and Banco Santander SA right now!

Today I’m looking at three Footsie giants investors should do their best to avoid.

Stuck in a hole

Deteriorating demand indicators across commodity segments makes BHP Billiton (LSE: BLT) a risk too far to me.

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In particular, the diversified digger faces huge upheaval due to its reliance on the coal and iron ore markets. BHP Billiton sources around half its revenues from these markets, so concerns over China’s construction industry — combined with the country’s carbon-cutting initiatives — puts the firm’s sales outlook under severe pressure.

And BHP Billiton, like many of its peers, is doing supply imbalances across its markets little favour by gradually ramping up production, steps that threaten to keep raw material values under pressure well into the future.

Indeed, the digger expects to spend $6.9bn on four mammoth expansion projects across the copper, potash and petroleum markets in the years ahead.

With commodity prices still toiling, the City expects BHP Billiton to record an 88% earnings slip in the period to June 2016. I believe a subsequent P/E rating of 70.3 times is far too high given that a bottom-line turnaround appears a long, long way off.

Market muddles

Investor appetite for Sainsbury’s (LSE: SBRY) has fallen off a cliff in recent weeks, its share price shedding a quarter of its value since the end of April alone. And I believe there’s more room for the grocer to slide as conditions in the supermarket space become increasingly difficult.

Latest Kantar Worldpanel numbers showed sales at Sainsbury’s fell 1.2% during the 12 weeks to 22 May, the worst performance for close to a year.

Sure, this reflects its departure from multi-buy promotions. But it also illustrates the on-going progress of the discounters — sales at Aldi and Lidl rose by double-digit percentages again during the period.

Sainsbury’s is hoping to transform its earnings outlook with the purchase of Home Retail Group, boosting its multi-channel proposition and reducing its reliance on the pressured grocery segment. But the huge competitive pressures also facing Home Retail’s Argos means the takeover is unlikely to prove a ‘silver bullet’ for the wider problems facing Sainsbury’s.

The number crunchers expect Sainsbury’s to endure a 9% earnings slide in the year to March 2017. And while a consequent P/E ratio of 11.7 times may be ‘conventionally’ low, I reckon the grocer’s mounting problems make it an unattractive stock choice at present.

Bank battered

The murky state of Latin American economies makes Santander (LSE: BNC) a potentially-perilous choice for stock hunters, in my opinion.

The banking colossus remains convinced that the region provides a route to hot earnings growth, and with good reason — a combination of rising population levels and fatter wage packets in the years ahead looks set to drive banking product demand.

But the worsening economic outlook in these regions, combined with a steady weakening in local currencies, means Santander could be poised for much further pain before things get better. The bank saw net operating income from Latin America slump 14.1% year-on-year in Q1.

The City expects Santander to see earnings slip 4% in 2016. A subsequent P/E rating of 8.8 times may attract bargain hunters, but I believe the prospect of prolonged pain in these key regions makes the bank a patchy pick, even at these prices.

Avoid these investment traps!

The flagging fortunes of Santander et al illustrate the huge risks investors face when trying to build their investment portfolios.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.