Changes in the world (mostly changes in technology) are putting long established companies out of business. Consider that Kodak and Blockbuster are gone and Sears is on life support. Were these things predictable? And does it make sense to invest in a company that is being hammered by changes in the consumer marketplace (i.e. Amazon), no matter how great a value it may seem?
It’s a very tough call. Predicting the future is very difficult, and as an outsider, how can you know? There are some clues you can look for in companies facing big consumer changes that probably are not going to make it. Here are a few things to look at:
- Listen the to the company quarterly conference call. If all management is suggesting is closing stores and reducing costs, it means they don’t really have a plan for dealing with the world of the 21st century.
- Look at the R&D expense. Are they cutting back to keep their earnings looking good? Doing this when they really need to innovate is a worrisome sign.
- Are they branching out into businesses they know nothing about? Years ago I did an analysis of a utility company that was buying a pharmaceutical company because the pharmaceutical firm had higher margins. It did not end well.
- Do they have mountains of debt? When companies owe a lot of money, they can’t go many quarters of no profits before the end arrives.
I don’t guarantee that companies doing none of the above will thrive in our high tech world. But their odds of making it are much better.