Regulated companies and price-competitive companies

Who are they? Regulated companies are commonly referred to as utility companies. They deliver services such as electricity, gas and telecommunications, commonly in a monopoly or duopoly environment.

Why avoid them? They are captive to the whims of the government or some regulating authority. If the authority thinks they are doing too well, they have the power to control what the company charges for its services and hence the company’s profits.

Limiting the profit of the company means limiting the return you get as a shareholder. Hence it is unlikely you will receive above average returns from these companies

In a price-competitive business, the company who has the lowest costs is the winner as this provides them with the greatest freedom to set prices because of their greater margins.

But they have to continually innovate to retain that advantage. Competitors respond by making similar improvements and then lower their prices to compete, setting up a vicious cycle.

The overall effect is usually larger debt and underperforming businesses as consumer choice tends to be motivated by price alone.

Return from Regulated Companies to Good Stock Investments