Focusing on Fundamentals Amidst the Election Hype

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As Election Day creeps closer, all sorts of pundits and prognosticators are telling us who is going to win the presidency -- and what it will mean for the economy and the stock market. Depending on whether President Obama is re-elected or Mitt Romney upends him, investors could be faced with some very divergent scenarios, many say.

Not Barry Ritholtz. Ritholtz, who has been one of the more insightful strategists around over the past several years, recently told Bloomberg News that the impact of elections on the economy and market is "overstated by most observers. … The forces that drive the economy, that drive society, are much bigger than any one election, and they tend to go on for years and decades."

While presidents' policies no doubt can have some impact on the economy and the stock market, I tend to agree with Ritholtz. So many factors go into the economy and market that extend far beyond the reach of the Commander-in-Chief. For example, the stock market thrived during President Clinton's tenure before tanking during President Bush's first year-and-a-half. But had Clinton been able to serve a third term, would the tech bubble's bursting not have continued to drag markets downward in 2001 and 2002? I find it hard to believe it wouldn't have. Similarly, had John McCain won the 2008 election, would the European debt crisis not have roiled markets in 2011? Doubtful.


From an investment perspective, I'm more concerned with the numbers on a company's balance sheet and in its fundamentals than I am with who has the keys to the White House. Good companies have thrived in a myriad of climates throughout history, and I think well-financed, efficient firms with cheap shares will continue to do well over the long haul -- regardless of whether Obama or Romney walks away victorious next month.

With that in mind, here are a handful of stocks that my Guru Strategies -- which are based on the approaches of such investing greats as Warren Buffett, Peter Lynch, and Benjamin Graham -- are high on as election season comes to a head.

Discover Financial Services ( DFS ): Illinois-based Discover offers direct banking and payment services. Its payment services options include its Discover cards, as well as Diners Club International and PULSE cards. The $20-billion-market-cap firm gets strong interest from the model I base on the writings of mutual fund great John Neff. Neff looked for stocks with low P/Es -- but not too low, since a very low P/E can be a sign of a dog. The model I base on his writings looks for stocks with P/Es that are 40% to 60% of the market average, and Discover's P/E (9.2) fits the bill.

Neff wasn't interested in huge growth numbers, which are often unsustainable -- and often come with a high price tag. He instead looked for companies with solid, sustainable earnings growth that was fueled by growth in sales. Discover's long-term earnings per share growth rate is 17.8% and its long-term sales growth rate is 27.1%, so it fits the bill (I use an average of the three-, four-, and five-year earnings/sales growth rates to determine a long-term rate).

Tech Data Corporation ( TECD ): With more than $25 billion in sales over the past year, this Florida-based firm is one of the largest wholesale I/T distributors in the world. It has a market cap of about $1.6 billion. Tech Data gets strong interest from my Peter Lynch-based strategy, which considers it a "fast-grower" -- Lynch's favorite type of investment -- thanks to its impressive 26.3% long-term EPS growth rate (based on an average of the three- and four-year EPS growth rates). Lynch famously used the P/E-to-Growth ratio to find bargain-priced growth stocks, and when we divide Tech Data's 9.5 P/E ratio by that long-term growth rate, we get a P/E/G of 0.36. That falls into this model's best-case category (below 0.5).

Lynch also liked conservatively financed firms, and the model I base on his writings targets companies with debt/equity ratios less than 80%. Tech Data's D/E is about 5%, another good sign.

Raven Industries ( RAVN ): South Dakota-based Raven ($1 billion market cap) started out more than 50 years ago as a manufacturer of high-altitude research balloons for the U.S. space program. Today, its Aerostar division still makes research balloons and other products like parachutes and protective wear. But Raven also has extensive operations that blend the fields of technology and agriculture, with products that include field computers, planter and boom controls, GPS guidance, and protective films and sheeting used to protect environmental resources.

Raven is a favorite of my Warren Buffett-based model. This model looks for firms with lengthy histories of earnings growth, manageable debt, and high returns on equity (which is a sign of the "durable competitive advantage" Buffett is known to seek). Raven's EPS have dipped in only one year of the past decade; it has no long-term debt; and its 10-year average ROE is an impressive 24.8%.

AmerisourceBergen ( ABC ): This Pennsylvania-based pharmaceutical services firm handles about 20% of the pharmaceuticals sold and distributed throughout the U.S., and also has operations in Canada. The $10-billion-market-cap company gets approval from the model I base on the writings of hedge fund guru Joel Greenblatt. Greenblatt's approach is a remarkably simple one that looks at just two variables: earnings yield and return on capital. My Greenblatt-inspired model likes Bergen's 12% earnings yield and 100% ROC, which combine to make the stock the 31st-best in the entire U.S. market right now, according to this approach.

My Lynch-based model also likes Bergen, which has been growing earnings at a 19.7% clip over the long haul and trades for a reasonable 14.9 times earnings. That makes for a 0.76 P/E/G ratio, which comes in under this model's 1.0 upper limit. The firm also has a reasonable debt/equity ratio of 64%, another reason the Lynch approach likes it.

Bed Bath & Beyond Inc. ( BBBY ): This New Jersey-based home goods and furnishings retailer ($14 billion market cap) has stores in the U.S., Canada, and Mexico, and has taken in about $10 billion in sales in the past 12 months. It's a favorite of my Warren Buffett-inspired strategy, in part because it has upped EPS in all but one year of the past decade. A couple more reasons this approach likes BBBY: It has no long-term debt, and has averaged an ROE of more than 20% over the past 10 years.

Bed Bath & Beyond also gets strong interest from my Lynch-based model. It likes the firm's 22.4% long-term EPS growth rate and 13.7 P/E, which make for a stellar 0.61 P/E/G ratio. And like the Buffett-based model, it likes BBBY's lack of any long-term debt.

I'm long DFS.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Stocks

Referenced Stocks: ABC , BBBY , DFS , RAVN , TECD

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