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Lunes, 27 de agosto de 2018
By James Mackintosh
Is rising corporate power hurting capital spending, wage growth and U.S. productivity? Central bankers meeting in Jackson Hole, Wyo., to discuss the issues will be worrying that the answer is yes. Investors should be thrilled if it is.
Economists are divided about the extent to which the changing structure of the economy is creating new monopolies, hurting consumers and workers and damaging corporate investment for the future. The division is easy enough to explain by looking at big technology disruptors: Alphabet , Amazon, Apple and Facebook are investing massively. They offer products that consumers love. They mostly pay their workers more than other companies (even Amazon seems to have no problem filling its relatively lower-wage warehouse jobs), and cities are falling over themselves to attract their operations. Study them, and it is hard to conclude that new corporate monopolies are exploitative, although of course in the future they might be.
Look elsewhere, though, and the U.S. economy does seem to have become less competitive. In almost every industry the top five businesses have a bigger market share, and although evidence on corporate markups is mixed, profits are up a lot and the share of economic output going to workers is down.
What the Federal Reserve worries about, shareholders should embrace. Less of the economy going to workers means more going to capital-that is, investors. Of course, having a functioning economy and democracy matters, but let the companies that will suffer from that sit in someone else’s portfolio. The ones you want have a commanding position in their business, limited competition and less need to invest. So long as that isn’t widely recognized, meaning they don’t trade at too high a premium to the market, these are the stocks to own for the long run.
This, broadly speaking, is the Warren Buffett maxim, and it worked exceptionally well for him for decades. Mr. Buffett likes to talk about “moats” protecting a company, rather than monopolistic positions, but so long as they deliver profits shareholders shouldn’t worry too much about the label.
If there are more of these companies, all the better for investors. That means more opportunities to find stocks able to generate a higher return on equity thanks to their ability to push through price rises, limit investment, or both. If they aren’t priced at a premium, investors get a bargain.
There are two particular risks faced by this approach. First, maintaining capital discipline is hard. CEOs sitting on big piles of cash love to find ways to spend it instead of giving it back to shareholders. Mega-takeovers and fancy new headquarters are the most obvious signs that discipline is slipping. It’s no good if the company generates fat profits and the C-suite fritters it away.
Second, the monopoly will eventually come under attack. The latest wave of disruption has hit a lot of the traditional “quality” stocks, and investors should always be watching for threats to market power. Mr. Buffett says his “favorite holding period is forever,” but few companies have true monopolies strong enough to withstand all change. Even if they did, they would still face the eventual threat of government action.
Food and drink companies have been the most obvious victims of assaults on their moats. Since the summer of 2016 shares in only three of the S&P 500 packaged-foods companies have risen. Campbell Soup , General Mills and Kraft Heinz are each down by about a third. All will need to spend more on their brands and on new products to keep up with changing customer tastes, but they are also suffering from the ability of newer, smaller companies to use the internet for distribution and brand-building.
Technology is draining the moats around some of the consumer-staples companies, too. Tobacco, the best-performing sector of the past century, is threatened by the switch to vaping. Even alcohol companies-the next best performers-are being forced to pay up to buy new rivals in beer and spirits as consumers move away from their traditional tipples.
William von Mueffling, founder of fund manager Cantillon Capital Management, says consumer health-care companies might be next to suffer from brand erosion.
He looks for less obvious moats when picking stocks, such as the market share of aluminum-can maker Ball Corp. , the technology of chip designer Analog Devices and the scale of discount brokerage Interactive Brokers .
“I would like to believe that we own duopoly or quasi-monopoly companies but there’s disruption in everything,” he says. “Moats come and go.”
Modern moats are around so-called network businesses such as Facebook, which become more useful the more people use them. But these moats are already widely recognized in high stock prices, and they also attract the attention of governments. Overpaying for a stock is an even bigger threat to future returns than competition.
One example from history: In 1998 Coca-Cola was the exemplar of the Buffett approach, the highly profitable leader of a global duopoly in sugary water. But its stock was even fizzier than its drinks, peaking at 50 times year-ahead earnings. Even as its business stayed strong over the next two decades, its shares struggled, and were below the 1998 high as recently as last month.
Just like Fed officials, investors are struggling to understand properly the impact of the new tech monopolies. Rather than worry about whether Amazon will grow enough to justify its forward PE multiple of 83 times, investors would be better off using their time trying to identify the many cheaper companies with moats that can be relied on to protect their profits.