The great thing about the share market is that everyone has a different opinion on a business. For every seller there's a buyer who thinks that business is worth owning.
I believe that it's a good idea to avoid shares that will underperform, if possible. Ultimately, it's very hard to say what a share price will do in any week, month or year. However, it's easier to see which direction the business is heading in the long run.
I think investors need to be careful about the following shares:
BHP Billiton Limited (ASX: BHP)
BHP is synonymous with the Australian share market and has created a lot of wealth for many Australians. But, investors always need to be looking forwards not backwards.
The underlying reason for BHP's success or failure will always be cyclical, that's the nature of resources.
Therefore, the best time to buy a cyclical business is at the bottom of the cycle. This occurred in 2016 when the share price fell to $15. The price has almost doubled since then. I'd wait until the next cyclical low before considering BHP shares.
Woolworths Limited (ASX: WOW)
Woolworths has had a mammoth battle with Wesfarmers Limited's (ASX: WES) Coles for decades. Woolworths appears to finally be growing sales again which is the main reason why the share price has risen.
The issue I have about Woolworths is that I don't see any sustained profit growth for a long time to come. Management dispensed with Masters, that was probably a good move. There's a lot of talk about dispensing with Big W, which could also be a good move.
But, the supermarket business' profit is where I am concerned. It's had to heavily decrease prices to get back on track, which really hurts the bottom line.
Aldi will continue to grow, steal market share and force margins lower. Kaufland is expected to start opening stores in the future. Costco is slowly expanding. Coles will try to wrestle back control. Things aren't going to suddenly get easier.
Woolworths is making the right moves, but sometimes you can do a great job and not succeed in the long run.
Woolworths is trading at 20x FY18's estimated earnings, which is quite expensive compared to Wesfarmers which is trading at 16x FY18's estimated earnings.
Suncorp is a solid business and could be an okay choice for an investor purely looking for income.
However, I think investors looking for growth should be careful.
The storms hitting Queensland have increased in number and size in recent years, which can really dent Suncorp's profit, particularly as it is focused more in the sunshine state than any other insurer.
Automated cars are just around the corner and it's expected that premiums will come down too. If Suncorp makes the same margin percentage on a lower premium, then that inevitably will see Suncorp's motor division bottom line reduce over time.
Suncorp is trading at 16x FY18's estimated earnings.
Foolish takeaway
All three shares could have a good next twelve months, but I believe in the medium-term investors need to steer clear of these businesses if they want to outperform the market.
