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The Verizon lesson: Make sure your 'sheltered' stocks are rock-solid Add to ...

If you are wondering why the Canadian stock market has been lagging most of the world this year, here’s one reason that is becoming increasingly difficult to ignore: Cozy, protected industries are being opened up to foreign competition – and investors don’t like it one bit.

First came the news that U.S. telecom giant Verizon Communications Inc. was thinking about moving into the Canadian market, through a $700-million offer for Canada’s Wind Mobile.

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No deal has been announced, but already Canadian telecom companies are doing everything they can to shut the door on Verizon. First, they complained the U.S. company’s arrival would put them at a competitive disadvantage; then, Rogers Communications Inc. decided on a plan to thwart Verizon’s arrival by snapping up the same wireless companies.

The market isn’t convinced that these are long-term solutions, however. The share prices of Rogers, Telus Corp. and BCE Inc. – all in the top 25 stocks in the S&P/TSX composite index, based on their weightings – are down between 12 and 20 per cent from their spring-time highs and took big hits on the initial Verizon news in June.

Investors are also facing a new reality with Canadian fertilizer companies after OAO Uralkali shifted strategies. The Russian potash producer announced Tuesday that it will leave its marketing group to focus on increasing its output, a move that could send prices tumbling more than 25 per cent.

The impact on Potash Corp. of Saskatchewan Inc., which operates through its own marketing group, has been severe: The stock, once the top-weighted in the benchmark index, crumbled more than 20 per cent this week.

There are big differences between telecom companies and fertilizer producers, of course. And the two industries already battle it out for customers.

But in both cases, all it took to devastate share prices was a relatively easy shift toward more competition – putting Canadian companies in line with what most industries face.

The S&P/TSX composite index has been struggling with weak commodity producers and an uncertain economy already, but these latest issues haven’t helped matters.

The index is up only 1 per cent this year, trailing gains of close to 20 per cent by the S&P 500. That puts Canadian stocks on track for their biggest annual under-performance, relative to U.S. stocks, since 1998.

That gives plenty of incentive to diversify abroad. As well, the recent telecom and fertilizer slip-ups provide a powerful lesson in what can go wrong with investments that are sheltered from wide-open competition, but remarkably vulnerable to it.

Shelters can be good when they are rock solid. Canadian banks, for example, operate within a kind of oligopoly that is highly regulated – not to mention highly profitable and immune from new players. This is unlikely to change, which gives the banks a nice glow.

Even better: Companies that dominate their sectors with competitive advantages, putting off new entrants. Investors are unlikely to run from TransCanada Corp., the pipeline company, at the first sign of the arrival of an upstart. Canadian National Railway Co. and even Tim Hortons Inc. offer a similar appeal.

To be sure, these types of companies might not deliver spectacular short-term gains because they tend to operate in mature industries where growth is slow and steady.

But if you have become dismayed with stocks getting knocked about by the sudden shift to a competitive landscape, safety isn’t such a bad thing.

Follow on Twitter: @dberman_ROB

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