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The Government as Benefactor for Selected Stocks (Part 1)

9 November 2007 - Features - Editor

Would you care to buy stocks of a company with a lucrative 5-year contract? Do not worry about non-performance in such a contract because it only requires you to answer questions about whether remuneration should be tied to work and results! This is neither a joke nor any flight of fancy, for the US government has actually awarded such a generous gift to a functioning consultancy. The most interesting part of this incredible deal is that it has been negotiated by presumably the most financially competent bureaucrats!

The US government is no passive advocate of outsourcing and renditions, but a passionate practitioner as well. You could cater to hungry administrators, protect key diplomats on who world security depends, proffer sagacious advice and even dream up new products and services all of your own.

Washington may lead the world, but it is not alone in being the most resourced customer group to be found in most countries. Even nations with scornful GDPs have federal budgets to keep fair sized corporations swimming in profits for ages!

The best companies develop competencies to bid and qualify for government contracts. It certainly beats searching for puny private clients, and keeps the fires of fixed costs aglow without any troublesome uncertainties-at least as long as the current dispensation lasts! How do companies win government favors, and how should investors respond to such approaches to profit generation?

Advantages and Risks for Stocks with Government Support

Winning government contracts can be most productive in marketing terms. Suppliers of goods and services can look forward to steady revenues without any direct need for continuing promotion and communication expenses. Moreover, large contracts from government departments serve branding needs in persuasive and indelible manner: customers in the private sector are bound to be impressed by track records of supplies to government bodies. Finally, government contracts can help companies enter new territories such as Iraq and Afghanistan, which may have been closed to them earlier. Armament suppliers are entirely dependant on government custom, but even companies involved in civilian sectors can enjoy substantial breakthroughs when they are favored by government patronage. Overall, investors would do well to select stocks of companies with consistent track records of dealing successfully with government purchasers.

All contracts specify quality, cost, and delivery time dimensions. Therefore, these aspects of government purchases should not worry executives unduly. However, what sets the government purchase system apart is that the purchase system matters at least as much as the other parameters. You may supply quality material or services on time and expect no more than the contracted rates of payment, yet run foul of executive, legislative, or judiciary branches of governance, because of process flaws. Indeed, multiple and repeated scrutinizes of unit transactions can threaten past revenues at any point in the future, buffeting values of stocks in the bargain. You can never rest easy when profits and business continuity depend on continuous government reviews! Needless to say, the situation is even more complex in some capitals other than Washington, so stocks of companies with substantial dependence on foreign governments are always highly vulnerable.

The Government as Benefactor for Selected Stocks (Part 2)

 


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