Avoid Businesses Without Solid Profit Plans

A big part of investing is knowing what NOT to invest in.  For me, I like to invest in companies with a solid plan to profitability, that even a monkey could run, like utility stocks.  However, it is essential to avoid companies that have no solid profitability plans, like Best Buy.

Here is what I’m talking about (BTW, this is one of my favorite video clips on business):

 

Companies With No Profit Fail – Period

The only goal of a publicly traded company is to generate profits for their shareholders.  Sometimes companies will go public before turning a profit – but they usually have a solid plan to profitability that investors like (this is the case with many tech stocks).

However, companies that have no plan to get to profitability are the ones you want to avoid.  For example, Best Buy was supposedly the biggest winner for customer traffic on Black Friday.  But it doesn’t matter how many cheap TVs they sold because they LOSE money on every TV.  That is a terrible profit plan.

The same is true with airline stocks.  Way back in 1989, Warren Buffett remarked:

If a capitalist had been present at Kitty Hawk back in the early 1900s, he should have shot Orville Wright. He would have saved his progeny money. But seriously, the airline business has been extraordinary. It has eaten up capital over the past century like almost no other business because people seem to keep coming back to it and putting fresh money in.

I have an 800 number now that I call if I get the urge to buy an airline stock. I call at 2 in the morning and I say: ‘My name is Warren, and I’m an aeroholic.’ And then they talk me down.

The point is, the airline market is so fiercely competitive that it is nearly impossible to consistently turn a profit.  Investors should be leery of these stocks.

What companies or sectors do you avoid because of poor profitability?

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Comments

  1. says

    Good post & very well put. I totally agree. The airline industry is one I steer clear from. I think the only possibility out of the lot might be LUV, but would still be very careful. I think a big problem with Best Buy is that they’ve either been unwilling or unable to keep up with the times and the changing retail market space. There are other ones out there that are unwilling to change and adapt and those are the ones I tend to avoid.

    • says

      I can see your point on Facebook with not being solid – but there is a plan around advertising revenue and it seems to be mimicking Google. Do you not think their plan will work?

  2. says

    This is a wonderfully clear and concise concept, that many investors completely miss. I would add that as far as profitability goes, I recommend looking at Free Cash Flow (FCF) and not just earnings. It is much harder to manipulate FCF and it tells you exactly how much cash management can return to shareholders, can use to pay debt, or can reinvest in the company.

  3. says

    I also like profit plans that are simple. Some schemes are so complex it’s obvious that it isn’t sustainable. If you can’t sum up your strategy in a sentance or two, you are likely an unnecessary part of the value chain and will get weeded out over time.

  4. says

    It comes down to a good strategic business plan. Bust Buy has not found their niche in the marketplace. Who are they? Are they Amazon’s showroom? Are they going to be the low price electronics leader like Wal-Mart? Are they going to go for the high end market? There is no direction there, no plan. That’s what is needed at these companies, and it needs to be articulated to shareholders as well.

  5. says

    Airlines are pretty rough and they are so dependent on oil prices. I agree to stay clear from business with South Park business plans. But since Circuit City is gone, doesn’t Best Buy survive by default? I know Amazon is dominating the online space, but don’t shoppers still need a place to lounge and play around with the latest gadgets and entertainment goodies?

    • says

      I doubt Amazon will survive, because there are other alternatives, like WalMart and Target creeping in on the market. Either consumers want a generic product, or specialty, and Best Buy is trying to do both (i.e. their Magnolia line and installations). The lower end consumer will probably go to WalMart, while the high end consumer may go to specialty stores.

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