With an increased emphasis on cost controls in today's post-recession economy, it may seem surprising that corporate waste is still abundant. While excessive C-suite luxuries and wasted company supplies are a serious problem for investors, the most significant industry waste is actually a necessary part of the production process. Today, we're taking a look at how the most "wasteful" industries of 2010 could impact your finances.
IN PICTURES: 7 Ways To Position Yourself For Recovery
By the standard we're using today, calling a company wasteful doesn't suggest that it's any less conscientious about taking good care of shareholder dollars than the competition. Instead, it means that the significant production inputs needed to run operations are high enough that investors should be well aware of what's going on.
After all, regulatory risks, commodities price changes, and dropped government subsidies threaten to crush the profitability of these industries.
So, which sectors are teetering on the edge? Overwhelmingly, the companies that made our list are in a commodity-driven business.
The Oil Industry
The increasing price of oil shouldn't be mistaken for the increasing cost of oil. With oil demand strong in the mid-2000s, oil companies like Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX) significantly expanded their E&P operations, pouring money into oil projects that were significantly more expensive. That was fine in the days of $140 oil in mid 2008 - but significantly less so in early 2009 when oil traded for less than $40 a barrel. (Find out how to invest and protect your investments in this slippery sector in Peak Oil: What To Do When The Wells Run Dry.)
Since then, oil has rebounded in a big way - back to around $85 a barrel as of this writing - but the damage of cheap oil had already been done. With scores of governments in the Middle East posting deficits and Wall Street earnings severely impacted by unprofitable oil production sites, investors are likely to be more cautious in 2010 knowing that they're victim to commodity price swings.
With heat over the rising cost of fossil fuels, investor dollars have been pouring into alternative fuel sources like ethanol, which is made from corn. But ethanol faces its own set of challenges thanks to inefficient technologies and enormous input costs. A professor at UC Berkeley calculated that one energy unit of ethanol takes six units of energy input to produce.
That's a startling statistic that's made worse by the fact that ethanol's subsidies cost American taxpayers around $4.18 per gallon. Although ethanol has beneficial practical uses in the energy sector, researchers must reduce its production costs significantly. (Interest in these new energy sources is growing. Should you buy in? Learn more in The Biofuels Debate Heats Up.)
How pricey is your food? While that burger on the McDonalds Dollar Menu might seem like a bargain, the beef in it wasn't - in fact, beef uses 35 units of energy (in the form of petroleum, grain, and other inputs) for each unit of energy produced. Plants aren't much more economical - they require an average of 5.5 gallons of fossil fuels per acre in the form of pesticides.
According to Sustainable Table, one study suggested that around 10% of U.S. energy consumption was from the food industry. (Trim the fat from your grocery bill to reduce the impact of food cost on your budget. Learn how in 22 Ways To Fight Rising Food Prices.)
A large portion of that cost was the result of highly consolidated means of production - produce and livestock are generally harvested on "superfarms" from which they need to be transported to reach the dinner table. However, an increased focus on locally available foods could curb this trend.
Interestingly, according to the book When the River Runs Dry, a single cup of coffee actually uses 1,170 cupfuls of water after the production inputs of the sugar and coffee beans are factored into the process.
Where the Rubber Meets the Road
So, should you steer clear of these high-input industries? Not necessarily. Companies whose products require substantial inputs aren't necessarily bad investments, but they do require a bit more analysis than stocks with double-digit recurring margins.
When you're taking a look at the company's investment potential, take into account how projected commodity prices and potential policy changes could affect the stock's fundamentals - and whether it still makes financial sense if a "worst case scenario" plays out. (They're hard to predict, but commodities cycles provide valuable information for traders. Check out Cashing In On A Commodities Boom.)
While wasteful industries may be more susceptible to market conditions than other stocks, don't rule them out solely because of their situations.
Don't miss what's happening this week in the financial world. Check out Water Cooler Finance: Buffett's Bank Fraud And Financial Eruptions.)
EconomicsLearn how the oil boom in North Dakota has transformed two small towns from sleepy agricultural outposts to booming centers of industry almost overnight.
Investing NewsOil has made headlines for its plummeting prices this year. When will prices rise again?
Chart AdvisorAgriculture stocks have experienced strong moves higher over recent weeks, but chart patterns on sugar, corn and wheat are suggesting the moves could be short lived.
EconomicsLearn about the four food superpowers -- China, India, the United States and Brazil -- and what sets them apart from the rest of the world.
EconomicsLearn what eight states produce over 90% of U.S. oil, and how fracking has helped the United States become the world's largest oil-producing nation.
EconomicsA make-or-buy decision happens when a company must choose to either manufacture an item itself, or buy it premade from a supplier.
Stock AnalysisUnderstand why energy companies' stock are volatile when oil prices are volatile. Learn about the top five energy companies to buy and hold.
InvestingWest Texas Intermediate oil futures have recently made pronounced movements. What do they bode for the world market?
InvestingGrowing global demand for quinoa has impacted Bolivian farmers' way of life. Should the American consumer be wary of buying this product?
MarketsDepressed crude oil prices are here to stay for the foreseeable future. Here's how it will affect an oil industry riddled with unsustainable debt.
In economic history, industrialization is the social and economic transformation of the human group from an agrarian society ... Read Full Answer >>
Just-in-time (JIT) inventory management focuses solely on the need to replenish inventory only when it is required, reducing ... Read Full Answer >>
The unemployment rate and Consumer Confidence Index (CCI) rank as two of the most important economic indicators to consider ... Read Full Answer >>
There is increased risk when investing in the industrial sector compared to the broader market due to high debt loads and ... Read Full Answer >>
Domestic energy investors should track the reserve inventory of crude oil for the United States, which is released in a weekly ... Read Full Answer >>
Oil and gas are two expansive and highly diverse product lines, with active competition domestically and internationally. ... Read Full Answer >>