Why I’d Never Buy these 4x FTSE 100 stocks

Food & Drug Retail

I am a firm believer that sometimes knowing which companies not to buy is just as useful as knowing which companies you should be buying. One of the most competitive sectors in the UK markets is the Food & Drug Retail sector. Today I want to take a look here, and discuss 4x FTSE 100 stocks that I would never buy.

I often hear investors and traders telling me they are long on certain companies and I think to myself “why?”. To me there are some obvious companies that everyone should avoid if their aim is capital growth. If you’re a dividend investor, that’s a different game, although even then you’d ideally want to avoid weak companies whose share price could fall and dividend payments falter.

But if capital growth (the growth in the value of the share price) is of value to your strategy, whether you spreadbet, trade or invest the UK markets, you’ll want to consider leaving the following companies off your watchlist.

Today we’re going to look at 3x UK Supermarket competitors and 1x supermarket disruptor all in the Food & Drug Retail sector. All FTSE 100 companies.

[TSCO] Tesco plc

Tesco are the largest of the 4 companies by a mile. They bring in £57 billion in turnover. Yet in 2017 they made net earnings of only 0.1% (£55 million). In 2018 that figure rose to 1.5%, but it’s still pitiful.

[TSCO] Tesco plc results are erratic across the past 10 years. Posting a £4.6 billion loss in 2015. The money is pouring back out of the company via the cost of sales and interest on debt which alone is at 80% of their profit some years.

As you’ll see, this begins a theme across the next few companies.

[SBRY] J Sainsbury plc

[SBRY] J Sainsbury plc are the next largest. But it’s a similar story. Turnover at £29 billion, but after cost of sales, expenses at 86% of the profit and interest on debt being far too high, they are left with 0.6% net earnings. The Argos acquisition in the last year has seemingly cost the business as the increased revenue achieved has been all but wiped out by even larger expenses incurred. Sainsbury’s may have a longer term plan with Argos, but I don’t see the move working out. I could be wrong, but Argos don’t strike me as the future of online retail now Amazon have the monopoly.

[MRW] WM Morrisons Supermarkets plc

[MRW] Morrisons are 3rd largest with £17 billion turnover. Again, cost of sales (the cost of buying the groceries to sell) wipes most of that out at £16.6 billion. What’s left is eaten up by expenses and interest on debts. After tax they keep 1.8% net earnings.

Remember here that my watchlist companies are typically sitting at around the 15% net earnings mark. These supermarket chains are therefore well off the mark.

[OCDO] Ocado Group plc

Finally, Ocado are the disruptor. Not quite the same business as the supermarkets, but in the same playground. Ocado are the smallest of the 4 with a turnover of £1.5 billion. Ocado’s cost of sales is far better than the others however. Giving them a 35% margin.

Unfortunately, almost every penny of it is lost in expenses (staff costs, rent, bills). These have typically been at 95-97% a year. In 2018 this reached 119%. Depreciation costs are also very high at 15% of the profit and interest on debt sits at 30%.

These guys pay very little to no tax each year. Unfortunately, that’s because they don’t make a profit. Ocado have made a net loss 7 out of the last 10 years. However, on the 3 years they made a profit, that profit did not come from the normal operations of their business but in the sales of one off assets or from “exceptional income”. These are profits made outside of their usual recurring income. When factored OUT of the results, Ocado have made a net loss every year for the last 10 years since floating on the markets. Last years report shows a net earnings of -7.4%.

So why the massive jump in Ocado’s share price from £6 to £10 in June 2018?

This was due to an announcement of Ocado’s International partnerships with Swedish company ICA and US grocery giants Kroger, a company with a $122 billion turnover. These are supposedly opening the doors for Ocado to hit the US and Sweden by opening 3x automated (robots and AI) warehouse facilities over in the states. Nice work.

The CEO stated that earnings impacts of these developments would not yet be evident in the 2018 Annual Report.

Since then the company has completed a joint venture with M&S UK, but has also suffered the setback of a major fire at their Andover facilities.

The 2019 report is due in December 2019. But as it stands, Ocado are in no way ready for watchlist status yet following 10 years of poor annual reports. Maybe one for the future?

Overall

The Food & Drug Retail sector is a tough sector. The competition is far too fierce between the UK Supermarket chains, with no singular company dominating. I’m looking for a company that’s dominating it’s sector and taking a large market share. Companies with too much competition simply do not make enough profits. They don’t have the margin, the buffer. When tough times come along, its these ‘paperthin’ businesses that suffer, posting net losses. Share prices fall or at best stay stagnant for 5-10 years.

Dividend investors may see some benefit, but as a share price growth investor/trader i’m not seeing much growth or dominance in any of these companies and so i’m avoiding them entirely. I see far greater businesses to put my money into for larger returns.

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About Chris Chillingworth

Self confessed lover of racing, american football and whiskey. Trader and Investor since 2011. Chris has now coached over +1500 traders using his mechanical systematic trading strategies and now also runs a members only watchlist of FTSE stocks.

View all posts by Chris Chillingworth

2 Comments on “Why I’d Never Buy these 4x FTSE 100 stocks”

  1. Chris, it’s interesting you are now giving share tips out (not a criticism) based on fundamental data along with your chart trend rules etc.

    I’ve been investing for 30 years based on fundamentals and have done OK, but the last few years have been tough. I came across you a few years back and started ignoring fundamentals and went just with a trend/chart based approach based on what you teach. My results have improved!

    Personally I think the stock market now days is driven differently than it was years ago, with computer trading programs and more manipulation by insiders etc., so you do need a different approach to do well.

    Look at Neil Woodford as an example – his approach over many years was successful and now he’s crashed and burned!

    I know some will blame Brexit etc, but to my mind value, fundamental, growth investing etc, are a lottery approach at the moment. Not to say things may change again in the future.

    Trend Trading Rules – At the moment! (and a lot less time consuming)

    1. I agree Ian, but we’ve not investing or buying based solely on fundamentals. Anyone who does will crash and burn.

      Let me make something clear as this is the 3rd message i’ve had which has seemingly misunderstood my approach.

      I still trade mechanical. My mechanical systematic trading systems are still what I use. They show me when to get in, and when to get out. However, to date, the stock selection process has been based purely on signals alone. When a signal comes, you trade it. Only you can’t trade them all. Sometimes your scans produce 20-30 opportunities. So how do you pick between them? For the last 8 years i’ve used a simple 4x filter process to identify stocks. In 2019, i’ve now using a 5x filter process. That 5th filter is analysing the company financials and filtering out all the companies that have not posted strong enough earnings results over the last 10 years. Does it make my approach fool proof? Of course not. Has it led to better stock selection, almost certainly.

      There is no abandonment of my mechanical trading and i’m not suggesting anyone trade based on the financials alone. I have never said that. The fact that people are misunderstanding me is my fault and it’s on me to re-educate. So thanks for bringing it to my attention. it shows I have not been clear enough.

      Chris

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