Safe Ports in Stormy Times
Telephone and electric stocks were once suitable for widows and orphans, but no more. What's low-risk now?
BY JERRY HELZNER
It wasn't too long ago that certain types of critically needed companies, such as electric utilities and telephone service providers, were granted monopoly status by the government.
Stocks of these companies were so safe they were purchased for widows and orphans. When these industries were monopolies, earnings and dividends grew steadily.
Other companies, including airlines and banks, weren't exactly monopolies, but for decades they were largely protected from anything resembling fierce competition.
Industries turned upside down
But the trend toward deregulation changed all that. Today, there's no greater example of cutthroat competition than the ongoing battle among providers of long-distance telephone service. And if you live in a state where electric utilities compete, you know how dog-eat-dog that business has gotten in the past few years.
With the old safe harbors gone, where can an investor look today for earnings stability? Here, I'll identify several industries that are at least somewhat insulated from the profit-robbing perils of intense competition.
Let's start with energy.
Illustration by Anthony
The major energy companies whose operations range from the wellhead to the gas pump -- such as ExxonMobil, Royal Dutch and Chevron -- are structured so that they can deliver a profit in almost any kind of market environment. When the price of oil is high, their exploration and production units are extremely profitable. When oil prices drop, their retail marketing divisions pick up the slack.
In addition, these huge companies have billions of dollars at their disposal to develop the big oil and natural gas fields that will keep profits rolling in for decades to come.
Many investors like the big energy stocks because these companies pay steady dividends, and regularly increase them.
Contracts go to big players
If big is beautiful in energy, it's also an attractive quality in the defense and aviation industries. Few defense companies have the money and experience to develop a new combat fighter or the next generation of missiles. With defense spending scheduled to rise sharply under the Bush administration, you can expect most of the big contracts to go to huge companies such as General Dynamics, Lockheed Martin and Raytheon.
As for civilian jetliners, there's Boeing and Airbus. These two companies will get all the major jetliner contracts for the foreseeable future.
Also, a near-monopoly is shaping up in titanium, a strong, lightweight metal increasingly used in aerospace, medical, energy, consumer product and construction applications -- not to mention, eyeglass frames.
Because of industry consolidation, only a few U.S. companies (ask your broker for the leaders) now have a major presence in producing titanium. These companies should be in an excellent position to supply industry's needs at favorable prices.
Patents can mean profits
One other area to research is the drug industry, where patent protection can enable a company to record huge profits for years as a result of a market-leading drug. We know what Tagamet did for SmithKline and how Viagra helped Pfizer skyrocket. Investors should remember that the ability to dominate a market spells opportunity for the companies that enjoy that edge.
Jerry Helzner has written more than 50 articles on stock investing for Barron's. He has been a regular stock market columnist for other business publications and was a member of the equity research department of a major regional brokerage firm. In addition, he's an associate editor for Ophthalmology Management.
Optometric Management, Issue: May 2001