5 Stocks Whose Fate Rests With November 6th
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The other day I was standing around talking with some co-workers at a luncheon when the room got a bit quieter and eyes shifted to the man entering the room. There, dressed to the nines, was the guest of honor, our soon to be former US Congressman (he’d lost in the primary this spring).
We’d invited him as a "thank you" for his great service to our community, a community that leaned heavily to what he kindly referred to as the “loyal opposition.” Instead of writing us off as the pains I’m sure we were, he worked hard on our behalf for the things that we both could agree upon. I’d only briefly met him before but I don’t think there is a politician out there that I’ve grown to respect more. He represented our greatest hopes of what Washington could be and he represented us well.
As always it was enthralling to hear him speak, he has a certain charisma about him. He answered the questions from the business and community leaders with candor and avowed to continue to fight for us until his last day in office. One thing he’d fought against and lost was when he went in opposition to his own party to vote against the Patient Protection and Affordable Care Act (aka Obamacare). It probably cost him his seat, but to this day he said it was the right thing to do.
He spent a good part of his time educating us on the bill by informing us of what was to come. No matter what happens on November 6, the bill is law and will be virtually impossible to repeal he went on to say. He went through the numbers, what seats were up for grabs and said that the math is pretty clear that the bill stays law no matter who is elected. From his expertise the key was with the US Senate, which he and his fellow colleagues from both sides of the isle refer to as “the enemy.” It would take a November 6th upset of epic proportions for the Senate switch hands enough for the 60 to 40 split necessary for full repeal.
What could change is the date when future pieces of the law go into effect. Coming from someone who had nothing to lose gave his words a bit more weight. Still, there is uncertainty in the market because of the bold proclamations that it will be repealed if that “loyal opposition” takes control. What is certain is that come November 6 we will know our path for the next four years. No matter which way the election turns there are three industries within our economy whose fate does immediately rest with the election: Defense Contractors, Coal Producers and Medical Devices Manufactures.
Defense contractors like Lockheed Martin (NYSE: LMT) and Raytheon (NYSE: RTN) will have more clarity as to whether the $500 billion in defense budget sequestration over the next ten years will become a reality or not. For Lockheed they’re warning of mass layoffs that could affect as many as 10,000 employees. In fact, CEO Bob Stevens has suggested that they’ll send layoff notices to all 123,000 of their employees the Friday before the election which just happens to coincide with the 60-day federal reporting requirements tied to the January 2nd sequestration date.
Meanwhile Raytheon CEO Bill Swanson is looking at it from a different angle. Recently he said, “When you look at this situation, I understand the danger, but there’s also an opportunity. And the smart companies, smart leaders, smart businesspeople know how to take advantage of opportunities.” One thing is for certain, in less than a month both CEO’s will have a bit more clarity on the opportunities that are ahead.
As the defense contractors receive clarity on the budget sequestration, our nation will also refine its energy outlook. While it would appear that one candidate is pushing for clean and green while the other is doubling down on dirty and drilling it’s not quite that simple. What is quite clear is that coal’s position in America’s energy future will be solidified as we cast our ballots. The industry has been engaged in a war with the incumbent’s administration and many are calling for him to be “fired” and a ceasefire declared.
Government support of clean coal initiatives would give companies like Arch Coal (NYSE: ACI) and Peabody Energy (NYSE: BTU) a fighting chance as they’ve been battered by EPA regulations, low natural gas prices and a slowing economy in China. The election will remove much of the uncertainty surrounding these and other industry peers as money currently being invested in alternative energy will either continue to be poured into that industry or diverted into initiatives cleaning up coal.
To invest in either before the election is a risky bet. Arch has $4.4 billion worth of debt against just a $1.6 billion market cap and has hardly earned any money the past three years while recently reporting a large loss. Peabody is a bit healthier but they also have a market cap as high nearly has high as the debt on their balance sheet. The leverage employed by both companies will amplify their outcome, which will remain clouded until Election Day.
Medical Device Manufacturers
In speaking of the outcome, the election’s outcome won’t bring immediate clarity to our health care industry. However, it is possible to delay some of the implementation of the ACA, particularly the medical device industry which will be facing a 2.3% excise tax beginning this January. The tax which is estimated to raise $29 billion over the next decade is one of many funding sources for the ACA. Stryker (NYSE: SYK) has said that the tax will force them to lay off 5% of their workforce. While the overall rate sounds small, the fact that it is on the revenue and not income means it can become a disproportionate share of income depending on the size and profitability of the company.
In simple terms, for every million dollars in revenue the tax will add $23,000 to the company’s expenses. Stryker with $8.3 billion in revenue could end up paying $191 million in the tax which is more than a 10% hit to their cash flow. Those smaller companies that have yet to turn a profit will get hit even harder. If the current administration remains in place we could see a wave of medical device mergers as these companies cope with the new tax. Meanwhile, if there is a change at the top it’s possible that the implementation of this tax is delayed if not terminated.
This will be a very interesting election for investors. More so this year than ever before there will be definite winners and losers depending on the outcome of the election. It is good to know that there are still some elected officials that do stand up for what’s good for their constituents even if it costs them their own jobs.
latimerburned has no positions in the stocks mentioned above. The Motley Fool owns shares of Lockheed Martin and Raytheon Company. 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.