Regulated Markets and Price-Competitive Companies
Regulated markets generally refer to 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. Think electrical retailers, food retailers and retailers in general. I would throw in airlines too, because they are not only price competitive but are usually regulated as well. The overall effect is usually larger debt and under performing businesses as consumer choice tends to be motivated by price alone. Commodity businesses are generally best avoided as they lack a key competitive advantage i.e. pricing power. Commonly, commodity businesses are also quite capital intensive. So I generally avoid regulated companies and companies whose operation is price competitive unless the company is a market leader. Return from Regulated Markets to Good Stocks to Buy
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