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August 10, 2017

Evaluating a Potential Industrial Investment

There is perhaps no more fundamental element of a healthy economy than strong manufacturing. If products are selling, products are being built. And those jobs at the top of the chain, the people who fill the cartons and trucks that go to the retailers, are the source of revenue for the people who shop for those products.

So for an investor, manufacturing is always a good starting point. But it's not a definite success. There can be bad investments in manufacturing just as there can be good ones. Learning to identify which companies are worth your investment dollar can be the difference between red ink loss and profits in your portfolio. Consider some of these strategies for evaluating your options.

Maintenance Strategies

It may seem premature to concern yourself with how a firm maintains their equipment, but the fact of the matter is that breakdowns are a major source of revenue leakage. No matter how much planning may go into staffing, utility consumption, logistics, and everything else, the equation will not balance if the equipment is constantly breaking down due to poor maintenance.

Invest in firms that utilize products like overlay pipe and cutting edge alloy technology. Companies that show enough foresight to ensure that critical equipment components can withstand heavy use are the same companies that can foresee market opportunities, regulatory changes, and all the other things that can affect their bottom line.

International Understanding

There has never been a more global economy than the one in which we live right now. While there will always be strong domestic markets for many products--especially perishable, fragile, and bulky items that are difficult to import--the real growth in industry may be in expanding third-world nations.

The debate rages on as far as to what will ultimately happen, and there will always be uncertainty from one administration and Congress to the next. But there is no doubt that whatever the details of particular international destinations, there will always be extensive international trade involved for any successful company, both for importing materials and exporting final products.

Marketing Strategies

It takes a solid plan to maintain and grow markets for a company to be worth investing in. If their longtime market of government contracts or as a supplier to venerable secondary products shows potential for faltering, it's time to look elsewhere. A company that is oblivious to the volatility of their major market is probably not making sound decisions in other areas either. It's an investment you will want to avoid.

As is always the case, a diverse market is essential. No company can place too much emphasis on a particular market outlet. Regulations can change. Consumer tastes can change. Imagine being a company that put 75% of its products into film-based cameras. You would have made money for decades, then would have watched your market shrink to a tiny niche when digital technology emerged.

Investments will always be risky. No matter what efforts you make to mitigate the hazards of placing your money in someone else's hands, the fact is that there are a lot of things that come into play, any of which can ruin your plans. So it's not about eliminating risk. If you want to do that with your investments, you should check treasury bonds or CD's.

Instead, it's about minimizing risk, about anticipating what could possibly go wrong and having a plan to avoid it or to be prepared to abandon ship when things start to decline. Industry will always be a strong investment sector, and with a good strategy for avoiding catastrophe, it can be profitable for you.

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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