But who’s protecting you from Uber?
What do you mean? Protecting ME...from Uber?
If there’s no regulation, who’s going to protect you from Uber?
Hmmm...I don’t know. I think it’s great. I guess it just works.
So who’s really being protected by the regulations, the customer or the taxi operators?
That’s a conversation I had last weekend with Sam, a young friend and barkeep, while day-dreamily running the economics of taking over the bar he’s been working at for a couple years.
At the age of 22, he just didn’t fully realize the power of government regulation.
He understood the paperwork, reporting requirements, and other costs to the business.
But he didn’t get the benefits onerous regulation gives to the business and why the bar’s liquor license -- which costs more than $100,000 -- was probably the most valuable asset in the entire place.
After the Uber questions though, he definitely got it.
And that simple understanding, especially in the U.S. today, is essential to investing in highly-regulated industries...or those industries about to get a heavy dose of regulations.
Frankly, we don’t like it. But dispassionately, we know there are fortunes to be made from it all.
Below I’ll show one of the clearest examples which has done astoundingly well over the last few years and the next industry set to make a big, government-regulation-driven run too.
The Next Government-Mandated Winner...
At this point, it’s clear to anyone paying attention regulation is one of the quickest and most sure-fire paths to business success.
Financial, pharmaceutical, healthcare, technology, and oil industries don’t “invest” billions of dollars in lobbying and political campaigns without expecting a return.
That expected return, in the face of an ever-tightening budget, is increasingly in the form of friendly regulations.
Take the Obamacare law. It’s a treasure chest of friendly regulations.
It has actually been a boon to health insurance industry.
And it’s the main reason why health insurance stocks have soared since the law passed.
The big insurance stocks like UnitedHealth (UNH), Humana (HUM), and Aetna (AET) are up anywhere from 200% and 270% since Obamacare was signed into law. The S&P 500 is up just 78% over that same period.
That’s the power of regulation. and why we’re focused today on another industry poised for an equally big government-regulation-driven run too.
I’m talking about the nutritional supplement industry.
This industry has fought (and won) regulatory battles for decades.
They know the costs of regulation, the limiting effects, and the time and staff requirements to meet the regulatory burden.
That may have all changed this week.
The U.S. government filed criminal charges against six executives at USPlabs, a nutritional supplement company with a reported $400 million in sales over the past five years.
The charges reference USPlabs claims it used natural ingredients while actually using synthetic ingredients. And a lot more stuff like that too.
The big difference this time seems to be the criminal charges.
This isn’t like the big banks. You know how that went. The government threatens to file charges. They all work out a deal. The banks cut checks for billions of dollars. Everyone keeps on doing what they were doing.
The only thing ever at risk in that situation was the company’s money.
This USPlabs news is personal criminal charges. Jail time.
Certainly a much different situation than the banks and a clear indication changes could be coming to the industry.
The market knows this too. Shares of supplement industry stocks took a bit of a hit after yesterday. Herbalife (HLF) dropped as much as 6%. Vitamin Shoppe (VSI) slid 8% following the news. And GNC (GNC), at one point during the day, was down 27%.
On top of that, the FDA also said it has sent “hundreds of warning letters” to supplement companies too.
Simply put, the foundation has been laid for “we got to do something” regulation.
And if history is our guide, some supplement companies will welcome regulations to ensure they actually benefit greatly from them.
That’s why I’m actually liking this set up because we’ve seen it so many times before.
Here’s how it works.
These regulatory pushes have two stages.
The first stage is the turmoil stage.
A media firestorm is ginned up to get popular opinion for the regulation.
Extreme regulations which threaten the life of the industry are proposed.
The second stage is the hero stage.
The proposed regulations are weakened a bit, installed, and everyone connected talks about how great these regulations will be.
Problem solved! You’re welcome...
Well, after that point, the market slowly realizes the real impact of the regulation isn’t going to hamper the industry at all. It will merely force a big divide between established interests and largest companies in the sector (the winners) and everyone else (the losers).
We’ve seen it in health insurance as shown above. There’s now basically the Big Five health insurers. In time there will be the Big Four and possibly the Big Three.
It has happened in hospitals too. More than 140 hospitals have merged since the Obamacare law came into effect.
It’s also happening in the financial sector which I called “Canadianization” of the U.S. banking industry back when the Dodd-Frank Wall Street reform law was passed.
If you go to Canada, there’s really only five banks in the entire country of 35 million people.
That’s exactly what will happen here too. It’s already starting to happen.
The law which was nominally passed to eliminate Too Big To Fail banks will actually make smaller regional banks less competitive and the big banks even bigger.
So if the supplement industry is about to get hit with some serious regulations, the play is a simple one.
Start by waiting out the turmoil stage. Watch the stocks drop with the regulator uncertainty. And then when you see the government bureaucrats congratulating themselves with “atta me” back-patting, buy the big established interests like GNC.
A 22-year old with no interest in politics at all understood it in about four minutes. So I’d expect Wall Street to get it...eventually.
And that period between you seeing what’s going to happen and everyone realizing it are where you make money in stocks.