Earlier today, we revealed five Australian companies that may find themselves uniquely placed in the most profitable sectors, according to industry research from FORBES, on the basis of their wide profit margins.
However, as a wise investor once told me, with over 2,000 stocks on the local sharemarket, successful investing is just as much about avoiding losers as it is about picking winners.
With that mind, here're four industries – and companies – you may do well to avoid.
- Non-Energy Minerals – Profit Margin: 1.2%
According to FORBES, the non-energy mineral sector may struggle to break even in 2015. While Australian iron ore, copper and aluminium producers like Rio Tinto Limited (ASX: RIO) will likely remain profitable; recent commodity price falls do not bode well for high-cost miners like Atlas Iron Ltd (ASX: AGO).
- Distribution Services – Profit Margin: 1.8%
U.S businesses in the distribution services sector (freight, warehousing, delivery, etc.) have very low-profit margins according to FORBES. Closer to home, Metcash Limited (ASX: MTS) – the distributor to IGA, Foodworks and owner of Mitre 10 – has so far found it difficult adjusting to the arrival of foreign competitors like Aldi. Like Atlas Iron, it produced a net loss last financial year.
- Energy Minerals – Profit Margin: 2.1%
The fallout of oil, coal and LNG prices have wreaked havoc on energy companies' bottom line. According to the study, the Energy Minerals sector has an expected profit margin of just 2.1%. Australian coal miner-cum-oil producer, New Hope Corporation Limited (ASX: NHC) produced a loss of $21 million on revenue of $505 million last financial year.
- Retail Trade – Profit Margin: 3.5%
Like warehousing, retail trade companies rely on volume. However, the retail industry is being disrupted by innovative online marketplaces that have minimal operating costs. Department retailer owner Myer Holdings Limited (ASX: MYR) is not immune to these pressures, having recently reported a statutory profit of $29.8 million on revenues of $2.6 billion – equivalent to a profit margin of 1.1%.
Buy, Hold or Sell
Although much more goes into a successful investment than a simple forecast of next year's profit margin, wide profit margins are usually a sign of a good business. Given the issues these businesses currently face, I'm not a buyer of their shares at today's prices.
