Contrarian investors, be wary of these industries

With survival now the name of the game for airlines and retail, should investors be steering clear of these industries?

Every investor has their own perspective and risk tolerance that dictates their investment strategy — it’s what makes investing so interesting. There are value investors, growth investors, momentum investors, those who are nearing retirement, and those who have just started their investment journey, who look upon the markets every day and in their own mind carve out the best opportunity for themselves. The beauty of this is that these five investors will most likely see five different opportunities. But is there anything they can agree on? Are there certain industries becoming untouchable for investors, whatever their outlook?

In a week that has seen some outrageous jumps in valuations for growth stocks like Chegg (NASDAQ:CHGG), Peloton (NASDAQ:PTON) and DraftKings (NASDAQ:DKNG) to name a few, I’m going to look at a couple of industries which do not share the same peachy outlook as these three young upstarts.  

In case you missed it: 

The Airlines Industry

What Buffett says, goes. 

The Berkshire Hathaway (NYSE:BRK.B) CEO rocked the aviation industry on Saturday. Talking at the company’s annual shareholder meeting, the Oracle of Omaha, a former avid fan of airlines who owned significant stakes in Delta (NYSE:DAL), United (NASDAQ:UAL), American (NASDAQ:AAL) and Southwest (NYSE:LUV), admitted that he “was wrong about that business” and “the world changed for airlines”. More damning than his words, however, were his actions. Berkshire unloaded all of its airlines holdings, billions of dollars in stock of the four aforementioned companies, at a significant loss to the business. 

For one of the primary proponents of the long-term buy-and-hold investing strategy to make such a move is an indicator of a serious shift in perspective on the industry, and I’m very much with him on this one. I wrote last month about why airlines may never fully recover (I’m not saying Buffett listens to everything I say but it seems more than a coincidence, no?), looking in particular at the outlook of business travel, but this may have been too granular. Airlines worked on thin margins before COVID-19 and it will be a long time before consumer sentiment returns to pre-pandemic levels, if it ever does. In the meantime, the cash burn of these businesses means that more than likely, some of them will not last. Whether it is through consolidation or bankruptcy, I think it’s safe to say that there’ll be fewer companies at 35,000 feet in five years. 

What this means for investors is that, however tempting the contrarian play is on these businesses, the risk far outweighs the reward. 

The Retail Industry

In a shining example of commercial Darwinism, the retail industry has been a test of adaptability long before the coronavirus grasped hold of our daily lives. Consumer behavior has perennially shifted online, thanks in no small part to the level of convenience afforded by Amazon (NASDAQ:AMZN), as well as the ease at which retailers can now sell their wares over the internet on services like Shopify’s (NYSE:SHOP). The global pandemic only worked to extend the gap between the haves and the have nots, with eCommerce specialists like Wayfair (NYSE:W) reaching all-time highs in the same week J Crew (NYSE:JCG) has been forced to file for bankruptcy. 

Stalwarts like Walmart (NYSE:WMT) and Target (NYSE:TGT) have shown they are moving with the times in thriving in such an environment, while specialist stores like Lululemon (NASDAQ:LULU) have carved out their own niche, indicating that adaptability is the most important attribute in surviving the retail apocalypse. For any investors looking to bargain hunt in the industry, this adaptability must be first and foremost in their minds when analyzing businesses.

MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above. Read our full disclosure policy here.