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Texas Booms, Investors Yawn

Matthew A. Winkler is a Bloomberg View columnist. He is the editor-in-chief emeritus of Bloomberg News.
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For all its success as the fastest-growing big state, luring the most business with a paucity of taxes and regulation, Texas is an inferior investment.

Even before the 14-month collapse that cut the price of oil by 63 percent, the publicly traded shares of Texas companies (64 percent are energy-related) underperformed the Russell 3000 Index. Since 2010, they've also trailed companies domiciled in California and New York, states known for high taxes and enthusiasm for regulation, according to data compiled by Bloomberg.

Stock Markets Rate Texas Companies 'Meh'

Source: Bloomberg

The Lone Star State's AAA-rated debt also gets modest respect in the bond market. Its return is third from the bottom among the nine states sharing the best credit rating during the past five years, Bloomberg data show.

State Bond Returns Are Middling, Too

Source: Bloomberg

What makes the Texas economy so impressive also limits its appeal in financial markets. Investors aren't looking at the past and present. They're looking for exciting things in the future. That can confer an advantage on states that are willing to actively shape their destiny and to invest in things like education and infrastructure. Low costs are fine, but high value is better.

Texas extols its low-cost, nonintrusive government approach as "wide open for business,'' and it continues to lure companies seeking cheaper labor and capital. Toyota, the world's No. 1 maker of vehicles, last year moved its North American headquarters and 2,000 jobs to Plano from Torrance, California.

Being the cheapest big state for business has benefits. Texas' gross domestic product increased more than the GDP of at least the 10 largest states in the U.S. during the past five years.

Since 2010, the workforce in Texas expanded 15.9 percent, the most after North Dakota and Utah. Texas personal income increased 37.2 percent during the same period, bettered only by North Dakota and Wyoming. Tax revenue increased 62.3 percent, trailing only the District of Columbia, New Hampshire, North Dakota, New York and Pennsylvania. Texas home prices rose 17.3 percent, lagging the gains only in North Dakota, D.C., California, Hawaii and Colorado.

Yet none of these achievements make Texas bonds a winner in the market for comparable state and local government debt. So far this year, the total return, or income and price appreciation, of Texas has amounted to 1.55 percent, better than only two other states with AAA-rated debt. The other six AAA states are enjoying superior returns: Virginia at 2.05 percent, North Carolina at 1.81 percent, Georgia at 1.84 percent, Utah at 1.79 percent, Missouri at 1.65 percent and Maryland at 1.57 percent, according to data compiled by Bloomberg.

Like bondholders, stock investors also perceive being cheapest for business as a strategy that favors the present over the future.

While companies domiciled in Texas produced a total return of 52 percent in the three years leading up to June 2014, when oil prices started to fall, the benchmark Russell 3000 Index returned 58 percent during the same period. Companies based in California and New York, two states Texas governors deride as bad for business, returned 75 percent and 52 percent during those three years.

So far this year, the August market crash pushed down stocks nearly everywhere. Texas shows a total loss of 16 percent, worse than California's 2 percent loss, New York's 5 percent loss and the Russell's 5 percent retreat, according to data compiled by Bloomberg. 

It's true that the oil-price collapse hit Texas companies hard. But it can't account for inferior investment performance in other industries. Shares of Texas health-care companies returned 104 percent during the past five years, compared with the 163 percent average for the industry. Texas information technology companies returned 98 percent, compared with 100 percent for the U.S. industry. Texas consumer discretionary companies, which include J.C. Penney, returned 110 percent compared with 152 percent across the U.S. Texas industrial companies, which include KBR, returned 84 percent compared with 96 percent for U.S. industrial companies since 2010.

Trailing market performance hasn't prevented Texas companies from getting bigger. They spent $220 billion acquiring other companies in 2014 -- the most since 2004 -- and $146 billion this year. Foreign companies also have been busy in Texas, seeking the same low costs as their U.S. counterparts, paying lower premiums for the Texas-based firms they acquire and proving above all else that Texas remains cheap, according to Bloomberg data.

The quality of jobs remains a weakness in Texas. Growth in per capita income in California and New York is superior to Texas. Even Rhode Island, the smallest state, does better than Texas, with higher per capita income growth. All of which suggests that being cheapest for business isn't necessarily best for investors.

(With assistance from Shin Pei) 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author on this story:
Matthew Winkler at mwinkler@bloomberg.net

To contact the editor on this story:
Jonathan I Landman at jlandman4@bloomberg.net