Yours truly found his way into a bit of hot water on Wednesday for comments made on-air about World Wrestling Entertainment (WWE). The company has a fanatical following globally, but I was surprised by the extent to which my viewpoints were raked over the coals by 40-year-old guys sitting in their mom's basement playing with their Brock Lesnar action figures.
However, the experience did reaffirm why it's essential to be able to differentiate bad businesses from good businesses in investing. Failing to do so could bring disastrous consequences to one's portfolio. Let's take the topic of WWE and broaden it out to include several other companies that are also bad businesses.
Three things that generally make a bad business:
- Absurd amount of competition that makes it hard to earn proper returns on invested capital.
- Relying on one thing too much to drive financial performance.
- Prohibitive costs to drive innovation.
Why WWE is a bad business:
- The model continues to rely on aging talent. When fan favorites like Hulk Hogan and Ric Flair drop dead, their go the eyeballs of the boomer and millennial generations.
- Lack of a strong connection by those 18 and under to the new cast of wrestling characters. The love for pro wrestling has been passed down generation to generation. If a current 18 year old can care less about John Cena, then that person's son or daughter will unlikely care 15 years into the future. I see this as long-term brand erosion.
- Intense competition for eyeballs from on-demand cable services to original programing on HBO and Netflix will hamper the long-term return potential of the WWE Network. WWE has invested a hefty sum in growing the network's domestic and international reach.
- The business is high risk, where top talent is frequently injured. If they are not on TV, they lose value by the day.
I obviously wouldn't be buying WWE shares. To alter my opinion, I need to see live attendance pickup, stabilization in pressured domestic ticket prices, and the WWE Network reach key subscriber marks when not running free trial promos (as was the case when it reached 1 million subs recently).
Why Sears and Aeropostale Are Bad Businesses
I expect these companies to be headlining retail disaster stories this month and in March. Here is why they are flawed businesses:
- There could be no guarantee that Sears (SHLD) unloads its best real estate assets to some loaded financial company or its clueless CEO Eddie Lampert. This is a key consideration for those clowns making the boast it should be viewed as an asset play rather than a traditional retailer.
- Other retailers are simply hitting a new operational gear while Sears and Kmart die in real-time. Wal-Mart (WMT) is expanding fresh food and organic offerings, so why go to Kmart? Target (TGT) is getting its groove back in apparel (see approaching April launch of Lily Pulitzer, which will cause a frenzy), so why go to Sears? Home Depot (HD) and Lowe's (LOW) are now selling connected home hardware and software, as well as 3D-printing services. So who cares about Craftsman tools, which continue to be poorly stocked at Sears stores?
- As for Aeropostale (ARO), its business is bad because it has no pricing power for its new, more fashionable merchandise that execs hope will save it from demise. In other words, all of the costs and expenses being poured into create a lovely garment for a teen is going down the drain as Zara, H&M and Forever 21 bring cooler stuff out more often, and at 50% of the price at Aeropostale.
Yum! Brands Earnings
The stock popped in after-hours trading in response to an earnings miss, as investors latched onto a very strong quarter from its Taco Bell business. In my view, there is more to McDonald's (MCD) turning its ship around this year by offering healthier burgers and wraps -- it has to regain lost market share in breakfast from a surging Taco Bell. Awesome new menu items by Taco Bell for breakfast are now on the menu, and I expect more news on this front quite soon. That said, I wouldn't be a buyer of Yum! Brands (YUM) shares; I wanted more overall profits (especially at Taco Bell with its strong sales print) and better trends in a China business trying to shake off a food quality scare from 2014. The earnings calls this morning might be worth a listen.