By Greg Jensen
In an excellent post, Eric Hale of Options Animal looks at the correlation between expectations for the last two elections and the S&P 500. He concludes that the market will rise on increased prospects of the incumbent party winning a Presidential election and fall on the prospect of change. This certainly fits with the oft-repeated belief that the market hates uncertainty. One might expect that, given their generally “pro-business” stance, any chance of a Republican victory in a Presidential election would be favored by the stock market, but the analysis doesn’t support that theory. It seems that “better the devil you know” is a stronger influence.
Eric writes from a trader’s perspective and says he uses the S&P 500 ETF SPY to trade the swings in the election predictions, but the analysis begs a question for investors. If he is correct and an Obama win will be greeted by a resumption of a rising market then their current portfolio will be fine, but should they be looking to add some holdings that could benefit from a Romney win now that the race looks closer? If you feel that you should, I have identified 3 stocks that could benefit from a Romney victory, but will not suffer too much if that does not come to pass.
Halliburton is an oil services company founded in 1924. It has a forecast EPS of $3.15 per share and a dividend yield of around 1%. They are a multinational company, with operations in around 80 countries worldwide. They have been the subject of some scandal regarding government contracts to build military bases and their involvement in the BP Deepwater Horizon oil rig that exploded in the Gulf of Mexico in 2010, and the stock is still well below 2011 highs.
HAL is ideally placed to benefit from more exploration and extraction of oil and natural gas in the U.S., and from a continued reliance on those energy sources. They could, in theory, benefit from increased (or at least not reduced) defense spending, but, given the controversial nature of that arm of their business, I don’t see this as a major factor. It is an old saying in investing that one should invest in pick and shovel makers rather than individual gold prospectors. An investment in Halliburton will serve the same purpose should Romney refocus US energy policy on traditional sources.
First Solar (FSLR):
I know, this is counter-intuitive, but bear with me! First Solar was incorporated in 2006 and is a clean energy company, specializing in the manufacture and of photovoltaic (PV) solar energy cells. It has a forward EPS of $3.06 and does not currently pay a dividend. FSLR has focused their efforts on sales overseas, where solar power is more popular and more heavily subsidized. Continued recession in Europe would be a worry, but their inclusion here is more to do with their competitiveness than any expansion in the market as a whole. One of the things that Romney has said he will do as President is to take on China. He has stated that he would declare them a currency manipulator. If this pressure were successful in forcing the Chinese government to reduce subsidies on solar panel production and even revalue their currency, it would make FSLRs products much more competitive globally.
Both the 5 year and 1 year charts above for FSLR look pretty dismal. Cheap Chinese PV cells have not been their only problem. Falling revenues from Europe and a lack of managerial direction have added to their woes. While the crisis in Europe drags on this will still be a factor, but recent noises from the ECB would indicate that they are getting serious about addressing the problems, and a management shake-up earlier this year will, hopefully, give the company more direction. FSLR is obviously a risky investment that would have to be closely monitored, but a Romney win, and the resultant pressure on China, could remove a significant barrier to future growth.
Bank of America (BAC)
Bank of America was founded in 1874, has a forward EPS of $0.94 and currently has a dividend yield of around 0.42%. Should Mitt Romney win the election, the benefits to BAC and other large Wall Street firms are fairly obvious. President Romney could be expected to offer a sympathetic ear to BAC and others, given his background in finance and he has stated a desire to repeal, or at least review, the Dodd-Frank regulations on the financial sector. Some of the most stringent regulations of this bill were in the credit card sector, where BAC is traditionally strong. It would seem the company is finally resolving its woes in the mortgage sector, and any recovery in housing will only help.
The 1 year chart for BAC is interesting, with a higher bottom forming at around $7 and a reverse head and shoulders pattern taking shape. Any break out of the $10 level to the upside would clear the way for a significant rise in price. The argument here is more about fundamentals, however. A relaxed regulatory environment and focus on private investment are likely in a Romney administration and this can only help an under-performing mega bank such as Bank of America.
The three stocks above have some potential whatever the result of the election, but for varying reasons a Romney win could be expected to give them an extra boost. Of course, should Gary Johnson win for the Libertarians, Eric Hale’s analysis would indicate that the “fear of the unknown” factor would cause a major collapse, but in that unlikely event the advice would be obvious; sell everything and buy gold!