Below is an alphabeical list, of sectors whose companies stocks I avoid investing in. These are not absolute rules. There are good and bad companies in every sector. But avoiding these sectors have saved me from many bad investments.
I have summarized years of my research, investing across various sectors in an article that will take only few minutes to read. But this is not an investment advice or substitute to your own research.
Both alcohol and tobacco operate in a highly regulated, and taxed sector. Alcohol itself is banned in five “dry” states of India.
Both of them face intense pressure from social tabbo, local players(both licit and illicit), “illicit” substances,. They both have a heavy dependence on agriculture sector for raw materials.
While the demand of these commodities might be somewhat inelastic. But the same can not be said for the branded variants of them, which these companies deal with. For example, due to increase in cost of cigarettes, consumers may switch to other nicotine products.
Just at the time of writing, ITC has slided 10% due to increased tax on tobacco. It formed a fresh 52 week low, and hit the lower circuit which halted trading. I avoided this because I had already booked profit by selling my 4 ITC holdings during ITC Hotels demerger hype in early 2024.
Real money gaming was banned by goverment of India. It did not effect me because I had not invested in them at the first place, or used their services since a long time.
Banks are difficult to value properly. Many standard financial ratios like Debt to Equity, current ratio do not work properly on them. As their business model relies on advancing loans, accepting deposits.
Banks are over-represented in NIFTY 50 and Sensex. RBI considers ICICI, HDFC, SBI as Domestic Systemically Important Bank which I believe it gives unfair advantage and credibility to them.
All of them react in same way to policy changes by Reserve Bank of India(RBI). For example, a cut in repo rate will decrease the interest that banks pay when borrowing money from central bank. For which they will be pressured to cut the rate of loans of customers as well. This will increase supply of money, and stock price. Hence, I only invest in one bank’s stock in my portfolio.
Cement is a cheap and bulky commodity with huge capital requirement, dependence on coal limestone, and other regionalized commodities. The industry itself is heavily regionalized and cyclical. It is heavily dependent on real estate and infrastructure sector, which are also cyclicals.
While it doesn’t faces competition from imports as cement it’s expensive to transport. For same reason it doesn’t have exports.
Coal is a regionalized fossil fuel. It is commodity as it is graded and standarized based on it’s Gross Calorific Value (GCV), the amount of energy it produces on combustion.
Some nations are already coal free. Several nations have vowed to phase out coal due to environmental associated with it. This means that coal stocks can not be regarded as a long-term investment.
The barrier to entry is high because mining requires a permit from government and expensive equipment, logistics. Coal India Ltd is a PSU which controls majority of the coal production in India.
But the majority of coal produced in India is bituminous. It has a high ash content, and a low GCV.
The demand for it is already decreasing. As Coal India has Compounded Sales growth of 7%, 8%, 9%, -1% for 10, 5, and 3 years, and TTM respectively. Some might argue that coal is slightly cyclical, hence the compounded sales growth gets decreased in contraction phase, but the real reason is the one mentioned above.
The steel industry is highly cyclical and capital intensive. It faces strong competition from the global market. As it’s products are largely undifferentiated and graded.
There are environmental concerns with it. It has a heavy dependence on coke, a coal byproduct. It is not only used as a power source to keep furnaces always running, but also a reduction agent during production.
Majority of Indian finished steel is imported from China. The industry relies on goverment regulations to remain competitive. For example here is the recent successful lobbying by steel industry to impose tariffs on steel imports.
Majority of Nifty Metals index is composed of ferrous metals like iron and steel. Non ferrous metals like aluminum is also around 16%. Zinc, Copper are a tiny minority.
I also do not invest in other “precious” metals such as gold, silver, platinium in any form. My reasoning is that they are not really precious, don’t have much uses, are voltaile, and do not generate any income. In case of physical version, there are also issues with purity, liquidity and storage.
Crude oil is a highly voltaile, and finite, non-renewable commodity. It is refined into various products such as petrol, disel, kersone etc. Small swings in it’s price can translate to huge changes in margins of refining and marketing companies.
India imports majority of it’s crude oil. There is global pressure on India to stop it’s import from Russia.
Paper is a low-value bulky commodity. The demand of paper is decreasing globally due to rise of technology and it’s environmental impact. The barrier to entry is extremely low due to which this sector is dominated by small, private companies.
While some paper stocks are showing some good returns, but they are all on paper(pun intended).
The sector is highly regulated, especially in USA, where most of Indian exports are. But the regulations in India are low which causes mistrust.
Most of the Indian companies focus on manufacturing Active Pharmaceutical Ingredients (APIs) or generic drugs, with minimal investment in research and development for innovative drugs. While this reduces costs, it also makes them vulnerable to competition.
The barrier to entry is high, and it also demands specialized knowledge from investors.
PSU are companies in which government owns atleast 51% of shares. They have a long history of corruption, inefficency. The PSU index has constitently lagged behind…
I also have philosophical reasons to not invest in them. As investing in them, is supporting state ownership and overreach in business.
I prefer sectors which have a high barrier to entry, non-cyclicals, low regulations, low dependence on debt and whose business models I can understand properly.
In the end, I judge a company purely based on it’s financial statements. Not through what management, media, or my own biases say.
A capital good is defined as something which remains in use for more than one accounting year. While they are commodities as well, but they have a high barrier to entry, stable demand, and are easy to value as well.
Capital market institutions include stock exchanges, depositories, registrars, AMC etc.
The barrier to entry and switching costs are is exremely high. In some cases, there are complete monopolies, and no alternative is available.
They are highly regulated, and often very overvalued. But still can be good investment, if bought at low price.
Chemical companies manufacture various products serving different industries. They are mainly of two types: commodity and speciality chemicals. Their customer base is mostly other businesses, due to which they can save on advertising costs, and have a high inventory turnout, unlike consumer goods.
The barrier to entry is high, and it requires highly specialized knowledge from investor. It can be cyclical, dependent on voltaile commodities like crude oil, and vulnerable to cheaper exports.
I did a fundamental analysis of GHCL, a soda ash manufacturer, which you can read here
High barrier to entry both in form of capital, and licenses, specialists required. The demand is independent of economic conditions, and higher during pandemics.
Do not forget about sector specific metrics such as Average Length of Stay(ALOS), number of beds. Prefer hospitals with focus on profitable divisions such as cardiology, neurology, oncology(cancer treatment).
The initial capital requirements are high, but maintainace costs are lower. This sector can be highly cyclical and dependent on global trade.
I avoid land logistics. Such as quick-commerce stocks and personally using their services. This model is not sustainable and many giants have already exited. Railways are heavily controlled by government.
I mostly focus on airports, ports, and related services such as containers. I avoid companies which are concentrated in one location. India has large coastline of 11,000 km, but it is concentrated in only few states. Smuggling often happens through these places which can decrease volume, margins and reputation.