Seeking Stocks Beyond Washington's Reach

This post appeared Tuesday on RealMoney. Click here for a free trial, and enjoy incisive commentary all day, every day.

At the start, I will admit to being a political junkie. I follow elections as if they were baseball games, complete with snacks and adult beverages. The electoral and legislative process fascinates me, usually in its absurdity. What I am not a huge fan of, however, is when the markets become overly politicized. Politicians will always have some impact on the financial markets, since they set economic and regulatory policy, but the current environment is reaching the point of the ridiculous.

Government influence and participation in the markets is at a level I have never seen in my career. It seems that every day the president or a congressional leader makes a speech or remark that changes the direction of the market.

New regulations are coming from every level of the government, and this is changing the structure and mechanics of the market itself. It complicates the process of picking stocks and choosing investments to build or protect capital. In addition to understanding valuations and finance, you need to be able to guess what the federal government might do and how it will affect your decision.

The scramble to fix the financial crisis and also fix the blame is creating an increasingly anti-business climate. It is coming from both sides of the aisle as well as from various federal agencies and the Treasury. The threat of new regulations and taxes is making business very hesitant to expand or invest for an uncertain future. Add in the various poorly thought-out, highly politicized green energy policies, and it becomes very difficult to pick investments for the long term.

To avoid the possible negative consequences, an investor needs to stay away from industries that have heavy regulation or government involvement. This rules out banks and other financial institutions almost entirely. Many of them are cheap on the numbers, and ordinarily I might consider them a screaming buy. I have been very cautious to act with these stocks, and government regulations and policies are among the biggest reasons for my caution.

Although I do own a couple of utilities, Duke Energy ( DUK) and Potomac Energy, this is another industry that is going to face considerable government intervention and taxes. In the face of a cap-and-trade bill, I am a little slower to buy the group than in years past.

Food for Thought

If you are concerned about the effect of government regulation on your stock picks, you have to stay with groups that do not invite substantial involvement by the inside-the-Beltway bunch. One of the best ways to achieve this is to focus on the "have to have" companies. Grocery stores are among the ultimate have-to-haves, in my opinion. We all have to eat, and today more than ever, people are taking their meals at home. Many grocery chains today also offer pharmacies, another must-have for many people. Other than the usual food and drug safety regulations, there is not a lot of government involvement or even interest in the grocery business.

My favorite name here is still Winn Dixie ( WINN). The company trades at a discount to tangible book value and has no debt on the books, so it qualifies as safe and cheap. Even in the economically hard-hit Southeastern states that the company serves, people have to eat. Although the grocery business has becoming increasing competitive, the company is well positioned to survive and eventually thrive. As fellow RealMoney contributor Sham Gad pointed out last month, the company has over $150 million of cash and $60 million of tax-loss assets on the books. The use of the tax assets could give it a competitive advantage over companies that have to write large corporate income-tax checks. As a bonus, at least one activist firm is agitating for a large share buyback or an outright sale of the company.

Another way to sidestep government involvement is to search out what I call addictive lifestyle stocks. Although consumers in these areas may curtail their activities and even delay purchases for a time, golfers golf, boaters boat, and runners run, no matter what the market or governments do. In the long run, this is good for companies like West Marine ( WMAR), Calloway Golf ( ELY) and Foot Locker ( FL). These types of activities are not so much hobbies as they are addictions. When Mr. Market offers a chance to buy these types of stocks at compelling valuations, it makes a lot of sense to add these names to your long-term portfolio.

We have a very politicized market right now. I am afraid it will be with us for some time to come. I do not like it any more than anyone else, but it is a fact, and we have to deal with the issue. Looking for safe and cheap stocks in industries that are off the federal radar screen is one sensible way of accomplishing this.


When will the Fed get around to raising interest rates?

Today
June
Late in 2010
Sometime in 2011
Never

At the time of publication, Melvin was long DUK, although positions may change at any time.

Tim Melvin is a writer from Stevensville, Maryland, who spent 20 years a stockbroker, the last 15 as a Vice President of Investments with a regional firm in the Mid Atlantic area. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Melvin appreciates your feedback; click here to send him an email.

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