The stock market is its own beast, wholly apart from the real economy. We tend to think that what's good for you is good for stocks, but that's not always the case.
The chief example? There is nothing more positive for the consumer than price competition. Consumers get so much good out of companies that compete with each other. We often forget, for example, how fantastic the Internet is for price competition. I remember, when I was growing up, if you took a rival ad in the paper to Lafayette Radio in Philadelphia, they would match the pricing on any stereo. This was just a plain marvel. You couldn't believe that they would change prices just because they wanted your business so badly.
But now, you simply go on Amazon, and look at who has the lowest prices for the same equipment. You just buy it, and it comes delivered to your door. No schlepping of heavy equipment, at least by you.
Of course, this is a total anathema. Not just for a store like Lafayette, which disappeared years ago, but for the late Circuit City, which bought a lot of Lafayette, and for Radio Shack (RSH), which seems to be on its last legs. Competition is a killer, and wherever you see it, you have to run from it.
This brings me to one of my long-standing recommendations, Gilead Sciences (GILD). Here's a company that has the best thing you could possibly have as a company, when it comes to a stock. It has the worst thing for the consumer: a monopoly on a cure for the dreaded scourge of Hepatitis C. The numbers were staggering: multiple billions of dollars in sales, something that many were talking about, could potentially bankrupt the system with its $80,000 regimen.
But Gildead was hit with a one-two punch in the last 72 hours, first with an approval for a drug from Abbvie (ABBV) for Hep C. While Abbvie's drug is considered inferior in terms of its dosing, it met the endpoints desired by Express Scripts (ESRX), the company that chooses formulations for about 70% of all customers.
In other words, there's competition that breaks up a monopoly. While we don't know the terms, it's pretty clear that they come in well under the pricing umbrella of Gilead.
No wonder Gilead's lost almost 15% of its value in one session. Plus, Adam Feuerstein, who follows this issue closely for TheStreet.com, is predicting that this is the new model for biotech. He also thinks that the whole group, which has had a spectacular run, could be under pressure for some time.
I don't know if that's the case. It's very rare that you have competitive drugs in the marketplace that cost as much as they do. It's very rare that they are roughly of similar quality. The only time you see this kind of price war is when a drug goes generic, and then its just a free fire zone for the lowest-cost makers of products, like Mylan (MYL) or Perrigo (PRGO).
Of course, one of the reasons I have stressed orphan drugs is that they have no competition. The drug companies can charge fortunes for them, because the alternative for the health care companies is some sort of care that costs even more with less results. But I can see how the whole group trades down, because there are many "almost, me too" products out there from biotechs that can cause pressure. I think that you have to back away from the group for now, and let it come in. Why bother to be a hero in a group that's up so big? Take a breather. Take some gains. We can always revisit.
I say that because when you are complacent about price competition, you can get your head handed to you. Take the phone companies. Wow, this was supposed to be a group that was consolidating with Sprint (S) being able to merge with T-Mobile (TMUS) to form a three-way oligopoly that was supposed to be an anathema to price competition. But the Justice Department's antitrust division let it be known that this deal would be blocked. AT&T (T) and Verizon (VZ) are now down 4% for the year, although the bountiful dividend has at least let them be in the black, net of all change. T-mobile's down 20%, as it has launched a severe price war to get you to switch to its phone plan. Sprint has been completely pulverized, down more than 60%, because of competition. It's been horrendous.
The autos can't rally much. Why? Too many of them. They are all going after the same consumer, and there's price cutting everywhere.
The banks still go at it all of the time, which makes for terrible gross margins. But Visa (V) and Mastercard (MA), while fierce competitors, are divvying up the world in the end.
The oil service companies compete, too. That is why it was a godsend for stock holders that Baker Hughes (BHI) and Halliburton (HAL) agreed to combine, although it didn't seem to matter in the end, because of the oil price collapse.
Many of the semiconductor companies have merged, giving them pricing power over the consumer companies. That's led to a huge revival of their shares.
There are some monopolies and franchises that are always being threatened, and that has led to a diminution of what you are willing to pay for their earnings. The classic example is Amazon (AMZN). We know that for years, Amazon has been giving the bricks-and-mortar companies the business. But we have seen one retailer after another adopt an omnichannel approach, where you can order online and take back to the store. It's a decent model. More important, it has put a real crimp on what you will pay for Amazon's earnings.
Now, lets compare these to how much we pay for what's perceived to be companies with very little competition. The continuing terrific investing story that is the airline industry hasn't let up, because these companies have carved up the country. That's been fabulous for United Continental (UAL), American Airlines (AAL), which used to be American and US Airways and Delta Air Lines (DAL), as well as Spirit Airlines (SAVE), which goes to routes where there used to be lots of competition.
We've had tremendous consolidation in the drug store business, which has given lots of pricing power to Rite Aid (RAD), CVS (CVS), and Walgreen (WAG). They have all been terrific stocks. I loved that Cowen upgrade of Rite Aid. Patience has been rewarded.
Finally, I like Facebook (FB), because it has a monopoly on yourself. What a fantastic business with a giant moat around it. This is what Warren Buffett's always talking about when he looks for his next investment. He loved, for example, the moat around Burlington Northern, the railroad, because CSX (CSX), Union Pacific (UNP) and Norfolk Southern (NSC) don't compete so there's huge price increases every time contracts come up.
Understand that when a group goes from having no competition to having perceived competition, you are going to pay less for those earnings, because you had thought the earnings would not be challenged by competitors. You simply cannot like an industry as much as you had before, if one big buyer of that industry's goods decides that it will pit one company's products against another.
Until this weekend, we had always figured that the outfits like the largest pharmacy benefit managers were helpless, and that would have to accept the pricing of the biotechs. Not anymore. The havoc's too great to ignore. Wait on the sidelines or take profits, until you are sure that the Gilead and Abbvie fight for share is an anomaly, not a newfound regularity.