You know how Warren Buffett mentioned that if interest rates stayed at 2% for the next twenty years, stocks ought to be valued at 50x earnings, but if they average 5%, they ought to go to 15x earnings?
The political analogy is that some sectors of the economy ought to be valued a lot differently depending upon which political party controls Congress and the Presidency. Twenty years of Republican rule will give me a different valuation for defense contractors, pharmaceuticals, and heavily regulated industries compared to twenty years of Democratic rule.
The nuance is that sometimes Government does have some upsides for the corporations that I frequently discuss on the site. Namely, the use of regulations to create a barrier to entry for competition.
For example, Altria and Reynolds have created a duopoly resulting from the past three decades of smoking regulations, as the heavy litigation that resulted in the Master Tobacco Agreement has made it all but impossible to be a start-up tobacco company today. Could you imagine those start-up competitions with a bright-eyed aspirational tobacco farmer? “I’ve got this idea for a product with 40% profit margins that is bought multiple times per week and will be used for life.” Sorry kid, you missed your calling by four centuries.
However, the recognition that the regulatory state does affect investment returns makes it easy for companies to get sloppy and blame politics when their business is not performing well.
On a conference call, the Gap said that the election affected last quarter’s sales. As if the prospect of a Trump or Clinton presidency is preventing a parent from buying their kids a pair of jeans.
Nigel Travis, the CEO of Dunkin’ Donuts, said: “I think people are rather fed up listening to all the election stuff. Uncertainty is not good for our business because franchisees have to invest and they want some certainty to invest.” This is a lame excuse. If a franchisee needs a new coffeemaker, that decision ought to be made independent of presidential politics.
The CEO of BJ’s Restaurants, Greg Trojan, said: “The tone of this year’s political season, regardless of where your allegiance may lie, has generated what some would call a nearly unprecedented level of negativity and doubt in the minds of everyday American citizens.” Maybe you could get away with blaming American politics for the poor performance at your business between 1861 and 1865, but it is insulting one’s intelligence to imply a causation between politics and pizza-eating. The chain restaurant was given the gift of the most-watched MLB playoffs in recent memory; why isn’t that mentioned as a compensating offset?
According to Bloomberg, over 500 companies have cited the upcoming election or general political uncertainty during earnings calls as a basis for poor operating and or stock performance. Highly regulated industries might be able to get away with this a little bit. But the scope of excuse-making has gone beyond that. What is worse is that many of these CEOs agree to give keynote speeches in which they preach about the importance of personal responsibility. A good start would be acknowledging that slow growth is a normal vicissitude of running a business and should be candidly labeled as such.