3 Sectors to Avoid Right Now

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How is the market like a funky hard drive? There are a lot of bad sectors out there.

You probably don't realize it after watching stocks kick up and down in unison like a Radio City chorus line, but there really are some industries that just aren't going to bounce back when the rest of the economy does.

I'm going to single out a few of the sectors that scare me the most, but with an unexpected twist: I am going to single out a stock in every industry that has what it takes to be the exception to the drool.

Your time isn't trivial, so let's dive right in.

If you're building a community of cookie-cutter homes in the suburbs or have cranes erecting metropolitan high-rises, I can't feel sorry for you. You've seen the glut of residential properties expand, yet you still unrolled the blueprints.

Shame on you, homebuilders.

Some investors feel that the time to pounce on the developers is now, just as losses are narrowing and some survivors are even back in the black. I wouldn't rush to that conclusion.

Existing home sales fell a jaw-dropping 27% in July, a record drop since that metric was introduced over a decade ago. Even some of the homebuilders that are holding up better than the pack -- I'm talking about you, Toll Brothers (NYSE: TOL  ) -- are pointing to softening demand and a slowdown in new contracts. There are almost 4 million unsold homes in this country. Why buy new, when serious deals are there for the taking in better locations?

Exception: NVR (NYSE: NVR  ) is the only homebuilder that I've recently recommended in my "Throw This Stock Away" column -- and with good reason. A healthy balance sheet and prudent management have helped NVR survive the malaise. It posted just one quarterly deficit at the tail end of 2008 and has gone on to top analyst profit targets in five of the past six quarters.

Cable and satellite television providers
Are cable programming contracts the new landlines? It's no longer a mere theory that folks will begin canceling their old-school television packages. Media researcher SNL Kagan reports that this past quarter was the first time the pay television industry suffered net subscriber losses. There were 216,000 fewer homes on cable, satellite television, or telco offerings than there were at the end of the first quarter. SNL Kagan feels the blip is temporary, but I believe it's more than an anomaly.

The tech darlings are rushing to roll out home theater devices that make it easier to pluck content from cyberspace. Apple's (Nasdaq: AAPL  ) new hobby may be a boon for content creators but a death sport for the ready, willing, and cable. It's true that the networks need to play along. If they can't offset the drying up of cable programming fees with online revenue-sharing opportunities, content can trip this revolution up before it gets a chance to charge.

Regardless, we live in customized times. Even hundreds of channels are no match for the on-demand mix of studio content, viral videos, and friend-generated clips that make up today's eye candy library. Economic hardships may push along cable dinosaurs to an earlier grave, but they were heading there anyway.

Exception: DirecTV (Nasdaq: DTV  ) has continued to grow during the recession, a shocking tidbit given that it's positioned as the priciest of the satellite television operators. The key draw here is its exclusivity of the NFL Sunday Ticket, with DirecTV paying the football league $1 billion annually through 2014 for those juicy rights. I'm not entirely sold on DirecTV because it will face pricing pressures as competitors mark down their programming packages, but it's a healthier bet than any of its rivals.

Video games
Diehard gamers are starting to show signs of life. Electronic Arts' (Nasdaq: ERTS  ) Madden 11 sold 5% more copies during last month's debut than the gridiron franchise's installment last year. Microsoft (Nasdaq: MSFT  ) may single-handedly reignite the industry since it's now less than a week away from its eagerly anticipated Halo: Reach, and there's the bar-raising Kinect controller hitting the market before the holidays.

I'm not so confident. There are too many people killing time on free or nearly free smartphone apps and social games on Facebook. It's not the quality of these diversions. They can't compare to the rich console gaming experience. However, it's the time suck that's problematic. Connectivity is also giving the more popular games longer playing lives, eating into the need to shell out $60 for a new game.

Exception: Take-Two Interactive (Nasdaq: TTWO  ) delivered an unexpected quarterly profit last week, fueled by the release of Red Dead Redemption. The Western-themed adventure has sold 6.9 million copies since its May launch. I won't sway from my theory that the industry is still in for a world of hurt. The reason why Take-Two's success with a franchise other than Grand Theft Auto -- and to a lesser extent BioShock -- matters is that it makes Take-Two that much more attractive as a buyout candidate. The hungrier that EA and its cronies get, the tastier that Take-Two will become.

Are any of these sectors better than Rick thinks they are? Are there any industries that are uglier? Share your thoughts in the comment box below.

Take-Two Interactive is a Motley Fool Rule Breakers recommendation. Apple and Electronic Arts are Motley Fool Stock Advisor selections. Motley Fool Options has recommended a diagonal call position on Microsoft, which is a Motley Fool Inside Value selection. The Fool owns shares of Microsoft. Try any of our Foolish newsletter services free for 30 days.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

Longtime Fool contributor Rick Munarriz is an optimist, even when he's waxing bearish. He does not own shares in any of the stocks in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.

Read/Post Comments (7) | Recommend This Article (42)

Comments from our Foolish Readers

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  • Report this Comment On September 08, 2010, at 12:34 PM, doylewd wrote:

    I think it's tough to report on the video game industry without mentioning Activision Blizzard. I know they sort of fudged their numbers last quarter to make it appear better than it actually was. However, take a look at their pipeline and you'll see they are poised to have a monster finish to 2010. They have just released a new Spiderman game that is getting very strong reviews and should cash in from the fanboys. The next installment in the Modern Warfare franchise is due out before the holiday season and the previous installment in the franchise topped $1 billion in sales in about 2 months on the market. While not technically video games, add to that the next expansion in the World of WarCraft franchise that is also set to be released this year and the long awaited sequel to StarCraft which went on sale this quarter and sold 3 million copies in its first month and you have the makings of a company poised to lead the way in its sector. I know the big news out of the sector recently was about Red Dead Redemption but this industry isn't so much about what have you done for me lately as what are you going to do for me in the next year.

  • Report this Comment On September 08, 2010, at 5:02 PM, mpendragon wrote:

    Video game makers have become a lot like Hollywood over the last few years. Blockbusters take a huge amount of money to make and there are still plenty of flops.

    While it's been somewhat difficult to make real money out of the games for mobile and social media platforms (Facebook) have low publishing overhead and a large pool of consumers and that is a more interesting growth area in this sector.

  • Report this Comment On September 08, 2010, at 5:36 PM, schack17 wrote:

    Please spare us your negative comments about DirecTV's compelling growth during this recession. As an avid TV watcher, we've moved away from cable years ago, first to Dish Network and finally DirectTV. Although having the NFL Sunday ticket package did entice many to make the initial switch, in our household we no longer subscribe to NFL ticket but for many other reasons have stayed with DirecTV. First, the picture quality and HD channel choice is far superior than cable, and we get at least 3 times as much dvr storage space on DTV than cable. Also, their customer service is far more responsive to issues and continuously adds new channels and crafts special sporting and music channels and packages with no extra charge. DTV is in it's own league on every front and we gladly pay a little more for superior quality and reliability. Cable for tv is a dead technology that relies on so much legacy infrastructure that is band-aided together. When comparing the channel packages to cable, we receive far more value for our money.

  • Report this Comment On September 08, 2010, at 10:30 PM, velodad wrote:

    In regard to building-

    Nearing retirement, I want to build a 1200ft/sq building for my muscle car hobby, on the back of my lot. I submitted plans to the building & safety office for approval. They assessed it at THREE times it's actual cost and won't have an answer to me for 8-10 weeks because there are so nanny jobs in the plan-check pipeline. True, the department's staff was cut back, but dang... the RE taxes will be around $1,500 a year, city fees up front are nearly $1,000 and I'll be doing the concrete and framing just before Christmas with the rainy season looming.

    Seems the City of Los Angeles is out to kill my construction project and the resultant jobs and gouge me in fees and future taxes. Maybe I should get my ASSET out of California to a governmental mindset that isn't citizen abusing & suicidal!.

  • Report this Comment On September 08, 2010, at 11:37 PM, lctycoon wrote:

    As a true gamer (or a recovering former one), I'd like to add - casual games on Facebook or a smartphone are not competition for ATVI, TTWO, and ERTS. The people that are buying the $60 games have absolutely no interest in the casual gaming products. Find any friend that plays WoW seriously and ask them what they think of Facebook games. I guarantee that their response will prove my point.

  • Report this Comment On September 11, 2010, at 7:25 PM, jonesericr wrote:

    I have to agree with Icytycoon on the fact that most serious gamers probably won't spend anytime with the apps found on phones. I see a market there but I don't see it as any type of threat or competition to the console and PC gaming. Those are on a different level of play and even though there is Modern Warfare version on the iPhone I deleted it long ago because it just wasn't worth the time.

    As far as Read Dead Redemption, I have the game and enjoy the game. Most games today are moving away from the single player campaigns except as a tool to get you into the online experience. From there they continue to keep you interested in the Downloadable Content (DLC) which you must pay for. This extends the life of the game, keeps the name in play and allows the company to develop the next big thing. This doesn't seem to be the way that Fallout franchise is going. I will play this game but I think it's in trouble if they don't follow a similar path that Red Dead is on, allow coop modes with your friends, and have an online piece to engage players.

    Don't get me wrong I love the single player campaigns but sometimes it's fun to play with your friends and discuss it around the water cooler.

    Oh yeah check out Lost Planet 2 that is a nice concept also. You play the campaign in either coop or single player without making a switch. This too is a nice way to keep players interested and looking for more games to purchase.


  • Report this Comment On September 15, 2010, at 8:40 AM, DSPexpert wrote:

    The Cable Industry is not on a slow roll to oblivion. Their business model may need to be tweeked a tad due to Netflix and other over the top content providers allowing folks to access movies of their choice on demand, but one still needs to access the Internet to access Netflix. Cable provides the Cable that allows the connection to the Internet, that is not going away any time soon...i.e Cable companies can price their Cable Internet offering to compensate for viewers canceling their cable TV subscriptions. Cable can purchase content and become the content provider, aka Comcast and NBC! Direct TV and Dish Network do not work in heavy snow and rain!! Cable does!!

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