A bad company in a bad sector is clearly oneto avoid, because everything is against it. A bad company in a good sector is arguablyworse, because it has no excuses. But a good company in a bad sector? Thats tricky.
The Good Banker
Santander (LSE: BNC) has a double problem. Theeurozones biggest bankis undoubtedly in a big, bad sector. Its problems are magnified because it is heavily exposed to Brazil, its second biggest market, which generates around onefifth of its earnings. The countryis perilously close to sliding into outright depression, Goldman Sachs warns, as it fightsinflation,a rising public deficit, plungingcommodity prices, endemiccorruption and political gridlock. Santanders profits have been further hit by the fall in the Brazilian Real, and fears over rising loanimpairments.
Things are better in Spain, its thirdbiggest market, as the local economypicks up, with help fromECB monetary easing. The worry is that low interest rates areallowing zombie businesses and personal creditorsto roll over unpayable debts, anddefaults could soar when interest rates finally rise. The UK is now Santanders biggest and most profitable market, thanksto the success of products such as the popular 123 current account, which won960,000 customers in nine months.
Santander can hardly be described as a good bank,given thatit announced a major fundraising and dividend cuts inJanuary. It is also exposed to at least one bad sector, arguablytwo.There may still begood reasons to invest, however. Its valuation looks undemanding at 10.1 times earnings. The dividend may have been slashed earlier this year but it is forecast to yield 4.3% by the end of 2016. Earnings per share should rise a steady 5% next year. A good prospect, but not great.
The Good Grocer
The supermarket sector is bad forestablished players, although young bloods Aldi and Lidl are thriving. Tesco and MW Morrison have had very bad years, the latter dropping out of the FTSE 100. J Sainsbury (LSE: SBRY) has done better, aided by its relatively upmarket status. Itsshare price is actually up 5% this year, against a 13% drop at Tesco and 19% at Morrisons.
In November, Sainsburys became the first major supermarket to increasemarket share for over a year. OK, it only increased share by 0.2 percentage points, lifting its market share to 16.6%, but that is a good performance in a bad environment. Sales grew 1.5%, and Sainsburys has high hopes for Christmas, where it traditionally does well, due toits focus on food. So there is hope that good could soontaste evenbetter.
I always thought Sainsburys was unfairly hit by the supermarket sell-off. Its share price was stagnating even when itposted 36 consecutive quarters of sales growth. Yet I reckonUK groceriesare still a bad place to be, given shifting shoppingtrends and the rise of the discounters. Sainsburys was forced to slash its dividend earlier this year, butis still on a forward yield of 4.4%. This is a bad sector, sadly, whichoutweighs much of the good at Sainsburys.
Personally, I prefer to buy good companies in good markets.
ThisFREE Motley Fool wealth creation report can help you find them, by picking out5 of the best FTSE 100 stocks you can buy today.
All five blue-chipsnamed in the report are ideally placed to deliver a heady combination of generous dividend payouts and long-term share price growth over the years ahead.
To find out their names and see how they could help you secure a comfortable retirement, simply download the documentThe Motley Fool’s 5 Shares To Retire On. The report won’t cost you a penny, soclick here now.
Harvey Jones has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.