1 Stock to Sell and 2 to Buy for Post-Election Armageddon

Ken is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Election season is here and red blooded American political wonks are glued to cable news. While most viewers wait to witness the spectacle that is sure to emerge during the homestretch of our democratic system's most dramatic event, I see an even more important political story emerging. As the elections enter their final stage, only a debate gaffe or October surprise can upset the apple cart. Investors are wise to tune into the election because the candidate that wins will steer the fortunes of business sectors over the next half-decade; however, I argue that the real econo-political drama is waiting after the acceptance speeches are read, tears are dried, and the confetti is swept away. This December, a lame-duck legislature will face off with an emboldened president over a budget debate that has the very real ability to shake the foundations of your portfolio. If the executive and legislature are unable to work out a deal, tax-cuts will be rescinded and cuts to defense become automatic.

Dr. Dennis Jacobe, an economist for the Gallup organization, recently wrote:

It will take cooperation on the part of both Congress and the president to stop the economy from toppling over the fiscal cliff. While the financial markets seem to be assuming that the fiscal cliff and related issues will simply be addressed following the elections, business executives would be wise to think about recent experience and plan as though that might not be the case

Jacobe's argument is that a highly partisan political climate is unlikely to produce the collaboration and compromise that is necessary to avert a December disaster. He recommends that business executives get their house in order for the fiscal cliff, and I think individual investors should consider applying his recommendations to their own situation. As the sole person running my portfolio, I consider myself the CEO of Ken Johnson, Inc. The time has come to get my house in order. You should consider doing the same.

Before I go further, I should state the obvious: There is no guarantee that our so-called leaders won’t find a way to kick the can further down the road. If a solution is found, business confidence should return and the markets may pop. My concern is with risk and reward. Markets are currently at multi-year highs. The pop we’ll see from an agreement might not be too large in the wake of an already significant rally. I think the better odds are that partisans will dig their intransigent heels in following election season. If the December political environment is toxic and we go over the fiscal cliff, the selloff could be brutal. Because I believe the odds are that compromise is unlikely and the near-term downside is larger than the upside, it is time to give consideration to a strategy for the fiscal cliff scenario.

The most obvious candidates for selling or shorting are those tied to government spending. This Motley Fool article lays out 10 publicly traded companies that receive a significant portion of their revenue from government spending.

Harris (NYSE: HRS) is one of the most respected companies on the list. Currently, Harris is rated 5-stars in the Motley Fool’s CAPS rating system. Highly rated CAPS Superstar and fellow blogger Glen Bradford gives Harris a thumbs up.  Bradford likes the company’s buybacks, generous dividend, and believes it is undervalued by the market.  I understand the arguments in favor of buying Harris based on valuation, but I think Harris owners will watch their shares crater if government spending goes into automatic austerity in a couple months.

Of course, a great financial collapse isn’t all bad. In the spirit of the political season, I feel its right to quote the Mayor of Chicago, Rahm Emanuel, who reasoned, “You never want a serious crisis to go to waste.”  If the United States goes over the fiscal cliff, Dr. Jacobe believes a recession will follow. My best advice for surviving a recession is to find the companies that save consumers money or enable business to pay down their debt. Two of the stocks that I’m betting on in a recession are Netflix (NASDAQ: NFLX) and Liquidity Services, Inc. (NASDAQ: LQDT). Netflix had its best run during the last recession as millions of consumers switched from high priced cable services to Netflix’s all you can eat movies for one low price business model. When times get tough again, I bet even more people will the cut the cord in favor of Netlix’s value proposition.

Liquidity Services works the other end of the recession. The primary cause of the potential coming contraction is government spending. Liquidity is the solution. As budgets tighten and government agencies become increasingly cost conscious, D.C. will start shipping its excess equipment to Liquidity to be auctioned off by the pallet load. Liquidity’s costs are fairly fixed, so the more the government puts up for auction, the more Liquidity shareholders will profit.

Because I believe the most likely outcome in December is continued gridlock, I’m going to put my All-Star reputation on the line and vote against Harris in CAPS. I believe Harris looks like a value play on the surface, but the odds are stacked that the company’s revenue is going to take a major hit in a couple months. Be sure to weigh in with your opinion in the comments section and then head over to CAPS and enter your own prediction.

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BoiseKen owns shares of Netflix. The Motley Fool owns shares of Netflix. Motley Fool newsletter services recommend Liquidity Services and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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