Political Trend Investing-Betting on Four More Years

By Adem Tahiri - October 16, 2012 | Tickers: AMGN, CELG, F, GM, PRU | 0 Comments

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Last week we examined the various political trends that would benefit, and thus, the stocks that would win under a Romney Presidency. Since Mr. Romney is not the incumbent there is the potential for much more radical changes in which industries would thrive should he be elected. If the President is to be re-elected the changes would not be as stark, but there would still be some clear winners, let's take a look at who should benefit from four more years.

Let's say you're an optimist. No let's say you're really, really an optimist. You may believe that in a second term the President could get his agenda passed with bi-partisan support. This would be, of course, through the most partisan (up to this point) Congress since Civil War times. Or perhaps, you're taking the long view to 2014 and you think Democrats will control all three branches of the government again. If so, you should consider going for alternative energy plays that rely heavily on government subsidies.

While, I can't join you in your optimism some stocks to look at would be First Solar or Sun Power. I point to alternative energy in this case because it's the most divided topic (in my opinion) across party lines and would benefit the most from a Democrat controlled government; however, if things even stay the same this is a shaky place to be--at best.

And that's what I expect, or at least what's most likely, for things to stay the same. As of this writing Intrade odds of the President winning re-election were at 61.1% but the Democrats face a steep uphill climb in Congress. While both parties will scramble to keep their seats in the house this year, with 33 Senate seats up for grabs (23 of which are Democrats), the Dems could lose control of the Senate. That means the President could find himself winning another term, yet facing even stiffer opposition to his agenda with a Republican controlled House and Senate.

In this lovely Country of ours however, the President enjoys ultimate veto power over any new legislation. That means that if you're betting on four more years, the most likely trend to bet on is for the laws that the President and Congressional Democrats put in place in 2008 to remain the laws of the land.

Obamacare Goes Full Throttle in 2014

"I like it"-President Obama on the term "Obamacare" during the first Presidential debate of 2012.

The affordable care act (a.k.a. Obamacare) has already had some provisions go into effect but the actual law will go into complete effect starting in 2014. Some argue that insurance companies may actually benefit from having an estimated 32 million new customers, I disagree, it's probably a neutral for them as provisions (like having to accept individuals with pre-existing conditions) will cut into profits.

One industry that will certainly benefit however is big pharma that is the companies that make new drugs and medical products as well as those who sell them. These companies are getting 32 million new customers with little added regulation or drawbacks and in my opinion the following companies currently look like a good bargain.

These companies are vastly different. Celgene and Amgen discover ways to help those with serious illnesses. Walgreen has been selling nearly every drug under the sun since 1916, through its nearly 8,000 retail outlets. The thing they share in common is that all three will benefit from "Obamacare" being upheld.

Presidential Power

I can't tell you who to blame for our problems in Washington, truth be told, most of the time I don't know who to blame. The thing that I think we all agree on is that, well, our two political parties--disagree. There are some policies that the President can institute all by himself, though.

For instance, at the beginning of this year, the President (through FHA) announced a policy that would allow many homeowners who had been making their payments on time (with a credit score of above 580) to refinance and take advantage of historically low interest rates. It's also worth mentioning that since a poor housing market impacts nearly all Americans (particularly the middle class) it's a policy area where the President is more likely to encounter some bi-partisanship

Now, while housing has actually been showing signs of life; due to the Administrations relentless efforts to give it a spark (Making Home Affordable Act '09, tax refunds for new home buyers, etc.) I would not advocate buying homebuilder stocks on this particular play. True, the housing industry contributed to the national GDP for the first time since 2005 in the most recent quarter, but between this program and the Fed's commitment to keep interest rates low (see QE3) continued homeowner financing and refinancing is a much safer bet.

In addition to Obama using his Presidential powers in attempts to boost housing you can be sure if he is afforded another term he will allow the Bush era tax cuts to expire (at least on top earners). Surprisingly the much beaten down finance sector has many value plays that could benefit from both of these factors.

This has been a much beleaguered industry due primarily to a lack of investor trust following the financial crisis of 2008. However, all of these companies stand to benefit from either continued homeowner refinancing (WFC, JPM), the expiration of the Bush Tax cuts, or both. While GS and JPM will offer high net worth investors guidance to dance around increased tax rates, Prudential will offer investment alternatives and has mutual funds sold through many Roth (tax sheltered) IRA's.

If you believe in housing and with low interest rates and refinancing being nearly a given, you'll probably want to go with either Wells Fargo or JPMorgan. Whichever way you go, these stocks will benefit from more of the same, and if the sector can ever regain the public’s trust we may look back at these valuations (one day) as downright ridiculous.

Presidential Power, Again-Let it ROAR

The sector that stands to benefit the absolute most however (in my opinion) by things staying the same is the (U.S.) auto's. The reason is much more subtle and to some it may not make sense, but let me explain.

In August the President struck a deal with all major automakers to increase fuel efficiency to 54.5 MPG for cars and light duty trucks by 2025. Again, this was a deal that the President was able to make without Congress, however, there's no way to tell if this requirement will be upheld with a new President. With many experts believing we're at or near "peak oil" and with no end in sight to high fuel prices, the U.S. Autos stand to benefit.

High gas prices benefiting autos? You betcha. While many people will forever have engrained in their memory how the U.S. auto industry collapsed in 2007 due to higher fuel costs, today I believe the narrative has completely changed. In 2007 the U.S. autos ceded ground to foreign automakers like Toyota as they failed to adjust to consumer’s preference to higher MPG vehicles. Remember not all autos did poorly back in those days and even today Toyota trades at a slightly richer forward P/E (9.93) than that of Ford and GM which are both around 6.

These valuations could be viewed as downright ridiculous because the industry has been on an absolute tear. With increasing sales and earnings, it's contributed the largest % to our national GDP of any sector over the last two years. Yet, investors remain stubbornly on the sidelines, like the financials, the nightmares of 2008 (and the industries collapse) are just too frightening.

The irony is that the primary reason (my opinion, again) that both Ford and GM have been doing so well is because they've adjusted to making the high MPG vehicles that consumers want to buy. If gas prices continue to climb and these companies continue to increase their efficiency (if the Obama policy is upheld) you'll see these sales continue to rise as consumers need vehicles with better and better mileage. At some point it becomes cheaper to buy a new car than to keep your old gas guzzler.

Of these two companies, I feel the clear buy is Ford. This is completely subjective, and I should mention that famed investor David Einhorn recently purchased shares of GM. I don't feel you can go wrong with either stock, but for me, it is about trust. Yes I have some bad memories of the past as well and I feel safer with my money in Ford's hands. Remember it was Ford that refused to take government dollars during the auto industries bailout and CEO Allan Mulally has done an admirable job of re-inventing the brand and their vehicle lines. Finally, while Ford may have more exposure to the troubled economies of Europe than GM, it's healthy 2% dividend yield gives me some peace of mind.

In the End, it all Stays the Same

Please remember that when I say the odds are in favor that the President will be re-elected, I am not endorsing either candidate nor am I making a statement regarding my political preference. I'm making a bet, based largely on where the Electoral College tally stands as of today. Whether or not you support the President, you'll benefit heavily if you can separate your political opinions from your financial ones.

Now is the time to be objective and to decide what you believe the odds of four more years, with Mr. Obama, are. If you believe they're high, you'll want to invest in more of the same. That's right, I don't believe we will see much more bi-partisanship, should the President be re-elected. I don't feel there will be any olive branches extended, any "coming together" for the best interest of the Country or any "grand bargains". In short I feel we will see the same dysfunctional "broken" Washington we've seen for some time, and for some sectors, that's terrific news.

Drive Your Future

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