Monopoly-Like Companies

By Sham Gad | December 14, 2009 AAA

The dream stock for any investor would be be one without any competition of any kind. Stocks are rarely if ever in that situation, but there are businesses that operate with limited competition, and for that reason alone are worth a close look.

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Otherwise known as monopolies, these types of businesses are all but illegal. The ones that do exist operate under government control for obvious reasons. Left unchecked and without any competition, monopolies would be free to charge whatever they wanted.

The utility industry is a great example as they often are the only provider of electricity in a city or town. Without government regulation of rates, they could charge whatever they wanted for electricity and we would have to accept it. (For related reading, see Early Monopolies: Conquest And Corruption.)

The Next Best Thing

While we might not have monopolies, there are businesses that operate in duopolistic type industries where a couple of businesses essentially dominate the industry. These companies can be very good investment decisions for the long haul. In boom times, they prosper; during recessions, they use their strength to pick up additional market share on the cheap.

All in all, that makes for a quality investment opportunity. The opportunity can be even more compelling when you can acquire these names during harsh industry conditions as you are likely to buy the shares at a much lower price.

Me Or You
The names that stand out clearly dominate. When one thinks of shipping packages, it's either UPS (NYSE:UPS) or Fed Ex (NYSE:FDX). When one thinks of buying a can of paint, light fixtures or other home improvement goods it's either Home Depot (NYSE:HD) or Lowe's (NYSE:LOW).

When you order a soft drink at a restaurant or movie theater, it's either Coke (NYSE:KO), Pepsi (NYSE:PEP) or Dr. Pepper (NYSE:DPS). When your car needs a part, it's either AutoZone (NYSE:AZO) or Advanced Auto Parts (NYSE:AAP).

Of course, dominance of the company within its industry alone is not an automatic reason to invest, but it is a very good reason. The goal is to determine which one has a more attractive valuation alongside strong future prospects because ultimately, these names will cater to more and more people as they will be the last ones standing while the others die off or get bought out.

The Bottom Line
In the case of the above group of names, it's a good bet that people will still be making home improvements, mailing packages, drinking Coke or Pepsi, and fixing the family car. Such a stable business coupled with relatively non-existent future competitive threats merits further investigation. (For more, see Monopolies: Corporate Triumph And Treachery.)

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