Share market crashes can be nerve-wracking, but they can also represent opportunity. A broad-based market fall like the one that has buffeted investors in the first few weeks of 2016 sees the share prices of even strong businesses with good economics punished.
But poor businesses with weak economics also fall quickly during these times. When presented with a share price that is much cheaper than recent highs, it can be tempting to view a stock price as a bargain.
But the three stocks on this list are examples of the kind of businesses to be very wary of buying, even when the price has fallen a long way.
BHP Billiton Limited (ASX: BHP) is a stock that almost every investor wanted in their portfolio at some point in the last decade. The company bounced back hard from the depths of the global financial crisis, more than doubling its share price from below $22 to above $47, driven primarily by the four pillar commodities of iron ore, copper, oil and coal. With the share price now hovering around $15, it is tempting to think that history could repeat itself, and the share price could recover.
However, the commodity cycle in 2016 is in a very different place to 2011. Copper and coal have been weak for several years now. The dive in the iron ore price, which was the cash cow for BHP for several years, has been as sudden as it was dramatic, and will not reverse as China's steel production has peaked, according to many analysts. In addition, the rout in the oil price brought on by oversupply by the major producing nations shows no signs of abating in the near term.
And at the end of the day, BHP cannot control the prices of any of the commodities it sells. So no matter how "cheap" it gets, at this stage of the cycle it remains a weak business as it has zero pricing power, and is a hostage to a commodity cycle that it has no control over.
Of course, BHP still owns a host of "tier one" assets across the world, and at some stage, chances are it will have commodities that are in demand once again, but to predict when that will be accurately is beyond most investors.
Qantas Airways Limited (ASX: QAN) is another business with poor economics, although the cratering oil price has hidden this fact. The share price has quadrupled from levels around $1 to over $4 at last close, leading some to conclude that it might be a stock to accumulate on weakness.
However, the dizzying improvement in the profits and margins are almost completely attributable to the decline in the oil price, which has slashed the fuel bills of the airline. Aviation fuel is one of the most significant input costs into an airline business.
But cast your mind back a few short years, and you may recall that Qantas was knocking on the door of the Federal Government for a multi-billion dollar loan. That was when the oil price was much higher of course. So while everything looks rosy now, the company is just as beholden to external factors like the oil price as it was back then. That means it remains a business with poor economics in a fiercely competitive international industry.
Fairfax Media Limited (ASX: FXJ) is one of those stocks that seems to go in and out of favour with analysts. Some weeks it is an old-world media stock with assets past their use by date, while other weeks it is an innovator transitioning its legacy assets into a digital-first media company.
However the fact remains that the digital mastheads owned by Fairfax (Sydney Morning Herald, The Age and The Australian Financial Review) are far less lucrative than the advertising streams from the legacy print assets were. The flipside is that digital subscriptions are rising at a commendable rate for these mastheads, which is providing an entirely new revenue stream, but these gains are not yet enough to offset the declines in print.
Despite the fact Fairfax owns the profitable Domain.com.au portal, one strong asset is usually not enough to justify owning shares in the whole company, especially given the rumours in the market that Domain could be spun off into a standalone entity.
Foolish takeaway
Share price falls can make a whole host of companies look more attractive, but be sure to look past the difference between the recent high and the current price and scrutinise the business model before you get seduced by what looks like a bargain.
