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.