What Makes a Company Powerful?
Here's a question for you: Which companies are the most powerful in the world today?
I don't necessarily mean "power" in terms of name recognition or the ability to maintain customer loyalty and revenue. Though these are very important things for an investor to consider. Like, Starbucks is clearly a powerful company. The company has a very loyal following. Starbucks can raise prices by 10% and no one bats an eye.
Starbucks has also been incredibly powerful when it comes to customer service. At any given time, the company has three months of revenue on gift cards, ready to be redeemed. It has about the best rewards program of any company. And there's even a "secret" menu of beverages that customers have invented and the baristas can make.
Add in the terrific benefits that Starbucks gives its employees, and you get a company that's essentially woven into our cultural fabric. If you want a Starbucks coffee, well, something from Panera just isn't as good.
It's a little different at Amazon.com. Amazon is singlehandedly killing traditional brick-and-mortar retail. Eighteen months ago, Macy's was a $70 stock. Today it's around $45, the same level it was back in 2012. And it's because of Amazon. Amazon has even been smart enough to entrench itself in a business that's far more stable than retail. Amazon Web Services (AWS) is literally part of the backbone of the Internet.
Yeah, to be so good at your business that you force others to change the way they do business is powerful. But does anyone really like Amazon in the way that people like Starbucks? I mean, we use the site for convenience, savings, and efficiency. A lot like we use Wal-Mart. I bet we'd shed exactly zero tears if Amazon or Wal-Mart started to fail. In fact, we might even be secretly cheering for it.
Fight for Your "Right?"
There's power like what the United Fruit Company wielded back in the 1950s. When its banana monopoly was threatened by a Guatemalan revolution, first Truman and then Eisenhower authorized coups against Guatemala's President Arbenz.
Any companies we can think of today that might be able to rally U.S. government policy and/or action to protect them?
I guess Big Oil still has the most influence over government policy these days. I mean, when you get the CEO of ExxonMobil as your Secretary of State, well...
Because the global economy is still based on oil. And so, you can definitely say that oil is a national security issue. But even then, the balance of power has shifted somewhat in just the last five years, because of the emergence of the U.S. shale oil industry. Saudi Arabia recognized the threat to its power. A primary reason that they boosted production and crushed prices was to drive U.S. oil companies out of business. It didn't work out as planned...
Turns out Saudi Arabia is much more sensitive to oil prices than the U.S. Sure, 60-some U.S. oil companies declared bankruptcy, but it's true that whatever doesn't kill you makes you stronger: U.S. oil companies cut costs and got more efficient, thereby dropping the cost of a barrel of shale oil into the $30s. Permian Basin oil is even cheaper.
Still, oil is a finite asset. And renewables are taking a bite, too. We may have already seen the peak for global oil demand. Big Oil will remain influential, for sure. But at the same time, the end game for oil has already begun. I may not live to see it, but my kids will see oil become a geopolitical non-factor.
We could probably put pharmaceutical companies in the same boat as Big Oil, at least in regard to their ability to push government policy. Pharmaceutical company lobbyists are the ones who have pushed Congress to pass the laws that give them far-reaching patent protection as well as carte blanche to charge whatever they want for drugs here in the U.S.
When running for president, Hillary Clinton said she wanted to change this. President-elect Donald Trump has said the same thing. Or actually, they both "tweeted" it... hmmm...
Stay on top of the hottest investment ideas before they hit Wall Street. Sign up for the Wealth Daily newsletter below. You'll also get our free report, "Five Techincal Analysis Tools for Investors."
Social Media Power
The tech sector wields power in a somewhat unique way. Tech drives innovation, and it often hits on business practices before anyone really figures out what's going on.
Like when Microsoft started licensing the Windows operating system. At the time, most people were focused on computers themselves. They were the cool new gadget. But Microsoft saw that what was really important was how easy the machine was to use and whether documents printed on one machine could be understood by another. And so, before anyone could even think about compatibility standards, Windows and Word became ubiquitous, and Bill Gates became the richest man in the world.
Look at the world's biggest company right now, Apple. There was a time, before Steve Jobs died, that Apple actually was revolutionary. The first iPhones were actually cool. I would argue they are not really cool anymore. iPhones are not the most innovative, advanced phone on the market, not by a long shot. Apple took power by being cool and innovative, and it's maintained power by simply being smart with its supply chain management, carrier deals, and upgrade cycles. In other words, Apple executes very, very well.
But just ask Nokia or Blackberry or even Samsung after its Note phone started bursting into flames — one executional slip-up, and that power is gone. My colleague Jason Stutman has some thoughts about exactly how Apple loses...
Tech has also recently given us powerful companies in the social media space. Take Facebook (NASDAQ: FB). It has 1.2 billion people that log in every single day. That is an amazing number. No single business has ever had that kind of reach. I used to be one of those users. But I don't like Facebook much anymore. It feels like a fad to me. Plus, I've been converted by the usefulness of Twitter (NYSE: TWTR)...
My man Jason Stutman doesn't think much of Twitter as a company. And he's right — management has done a terrible job of promoting and monetizing the platform. But to me, that spells opportunity.
Where does news break these days? Twitter. CNN has to go to Twitter to find out what's really going on. Our next president is going to use Twitter a lot. Twitter helped Trump win the election. One tweet from Trump about the costs for the F-35 fighter knocked $2 billion off of Lockheed Martin stock.
One tweet = $2 billion. That's power. And with a market cap of just $13 billion, it's cheap power. I think Twitter could be the first buyout of 2017.
Until next time,
An 18-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.