New investors want to succeed and not lose their money in the first year and other investors want a solid foundation for a strong retirement portfolio.
When building a portfolio, you need to start somewhere, and the easiest way is to start with the stocks you will hold forever. Those stocks are known as the foundational stocks. They are the go-to stocks for many investors and those investments that let you sleep at night.
The simplest way to find the foundational stocks for your portfolio is to look into the oligopoly stocks.
By looking into those oligopoly companies, not only do you get a defensive investment during hard times, but you also get an investment that can go in the offensive to generate good returns.
What Is A Foundational Stock?
A foundational stock will often be seen as a blue-chip stocks but as you know, not all blue-chip stocks are equal.
You need to go a step further to consider your blue-chip stock as foundational and it’s to ensure it has a stable business.
You want to look for a mega cap or a large cap stock in a mature business cycle. Anything outside of that and you are adding risk which is the opposite of a foundational stock. Often times, the market cap tends to map to the business cycle but if you want a primer see below.
|wdt_ID||Market Cap Tier||Value Range|
|1||Mega Cap||> $200B|
|2||Large Cap||$10B - $200B|
|3||Mid Cap||$2B - $10B|
|4||Small Cap||$300M - $2B|
|5||Micro Cap||$50M - $300M|
|7||Nano Cap||< $50M|
Business Life Cycle
- Start-up: A new launching new products or services. Rarely do they trade on the stock market. Still proving themselves ahead of an IPO.
- Growth: Successful launch and growing. Usually with rapid sales growth. Looking at an IPO and turning a profit.
- Established: Sales are slowing down from competition or saturation.
- Maturity: Sales are normalizing, and profit margins are getting thinner.
- Expension/Decline: This is an adapt, or fail turning point. Larger companies will have products go through the cycle internally at faster rate.
What Is An Oligopoly Stock?
An oligopoly stock is a company that operates in an industry where there are only a handful of companies that compete with each other and with little room for new entrants.
Governments tend to watch them closely and will usually bring regulations to avoid them forming a monopoly as it’s not in the best interest of consumers.
While an oligopoly company has limited competition, it can also have more regulations to balance their strength in regard to the consumers. Those companies must play by an increase set of rules and work to reward investors.
Here are a few industries with oligopolies in Canada:
- Telecommunication services
- Regulated Utilities
Start With Oligopoly Stocks
The easiest way to start investing and turn on the compounding machine is to start with oligopoly stocks and the near oligopoly stocks. Below is the list by their industries.
Telecommunication Services Stocks
Utilities – Regulated Electric Stocks
|CNR||TSE:CNR||Canadian National Railway||113.17||22.45||1.79||YES||1||9||78|
|CP||TSE:CP||Canadian Pacific Railway||96.46||35.80||0.73||YES||1||9||78|
What About Dominant Companies?
There are cases for dominant companies that operate like an oligopoly while being open to competition such as the banks or the insurance companies.
Big Bank Stocks
|BMO||TSE:BMO||Bank of Montreal||89.13||7.29||4.19||YES||1||7||21|
Life Insurance Stocks
|SLF||TSE:SLF||Sun Life Financial||36.42||9.77||4.44||YES||1||7||54|
|GWO||TSE:GWO||Great West Life||30.28||9.65||6.03||YES||1||7||55|
The Best Oligopoly Stocks
That leaves us with 6 industries which is also providing with a decent diversification in order to avoid concentration in one specific industry.
The best telecom stock has to be Telus. I opt for Telus has it has diversified itself away from media content unlike the other players and is almost turning into a high growth tech stock by focusing on underserved markets. In a way, it’s generating cash flow from its telecom business and re-investing in other segments.
The best railroad stock can be either of the two option I would say. I have preferred Canadian National Railway for a long time but the recent acquisition of Kansas City Southern by Canadian Pacific could turn the tides. I have preferred Canadian National Railway for the consistency in the end.
The best pipeline stock goes to Enbridge. It is also a regulated utility in Ontario but above all, its existing pipeline is the best way to connect North America to oil. You might not want to invest in a pipeline from an environmental perspective and that’s your choice.
The best bank stock is not the one you think. In fact, it’s the smallest of the big 6 banks and it’s National Bank. However, if you don’t want to go with the smallest, you have to pick between TD Bank which is expending in the US or Royal Bank for its capital market. Start with one but I have all three in my portfolio.
The best insurance stock has to be Sun Life Financial. However, Manulife is the biggest with a lot of exposure in Asia and could rebound. It has has the highest yield depending on how you get setup. If you are really young, go with Sun Life but if you are older, these days I would pick Manulife.