Most Americans have spent the last year trying to figure out what an Obama or a Romney victory would mean to their lives for the next four years. Due to differing political agendas, some people will benefit more from the election of one candidate than from the election of the other. Policy differences between Obama and Romney also mean that different sectors of the economy will outperform others. This trend can be capitalized on by purchasing market leaders in sectors that should benefit, or by purchasing an Exchange Traded Fund for that particular industry. Here is a brief walkthrough:
If President Obama is re-elected:
Sectors that will benefit: Generic Drug Companies, Clean Energy, Technology
If President Obama is reelected this will remove any lingering uncertainty about his universal health care plan taking full effect. This will likely aid companies which manufacture generic drugs, while harming insurers and managed health care providers. The leading manufacturers of generic drugs are Teva Pharmacuetical Industries (TEVA), Sandoz, which is owned by Novartis AG (NVS) and Sanofi (SNY). Below is a comparison of NVS and SNY charted against the S&P 500 index (SPX)
If Obama wins, look for generic drug manufacturers to outperform the general market in the next year.
Both TSLA and FSLR have struggled mightily in the last year, underperforming the S&P500. Even with an Obama re-election both companies face a continued struggle for profitability. Both companies should see a strong post-election rally in the short term following an Obama victory however. TSLA reported better than expected revenue on Monday, causing the stock to soar despite a larger than expected loss in Net Income. This positive earnings momentum should continue for the rest of the week, especially if Obama is re-elected. For investors who are more focused on the long term, PowerShares Cleantech Portfolio (PZD) Exchange Traded Fund provides a solid opportunity to bet on continued strength in Green-tech.
Below is a chart of FSLR and TSLA compared to the S&P 500 over the last year:
Stocks to consider if Obama wins: TSLA, FSLR, PZD, NVS, SNY, TEVA
If Governor Romney is elected:
Sectors that will benefit: Energy & Utilities, Financial Services, Defense Contractors, Dividend Paying Stocks, Managed Healthcare providers
Mitt Romney is on record saying that he would repeal some of the restrictions placed on financial service firms by Dodd-Frank which should aid financial service firms, according to Tobias Levkovich, Citigroup's chief U.S. equity strategist. Goldman Sachs (GS) and JP Morgan Chase (JPM) should continue to lead the financial services sector hire in the event of a Romney victory. Another way of trading a Romney win would be to buy the Financial Select Sector SPDR (XLF) Exchange Traded Fund.
The Energy and Utilities sector should also outperform following a Romney victory due to Romney’s decidedly pro-oil and pro-drilling policies. Romney has pledged to embrace the Keystone Pipeline and loosen environmental regulations on drilling for oil and “fracking” or hydraulic fracturing for natural gas and oil. A Romney win would benefit Continental Resources (CLR) as well as the rest of the oil industry. Romney has tapped Harold Hamm, the CEO of Continental Resources to serve as one of his top energy advisors. This will surely bring about oil friendly initiatives from the White House. In the short term, the utilities sector should be avoided since many large players such as Consolidated Edison (ED) are still being negatively affected by Hurricane Sandy.
Another industry that will likely benefit from a Romney victory is the Defense Industry. According to James Bianco, who runs Bianco Research, “if Obama is re-elected the automatic cuts to defense spending which were previously agreed on when the debt ceiling was raised will go into effect. If Romney wins, he will seek to repeal these cuts, increasing defense spending.” The companies best positioned to profit on an increase in defense spending are industry heavyweights Northrop Grumman Corp (NOC), Lockheed Martin (LMT), and Boeing (BA).
If Romney wins The Presidency, and the Republicans gain control of Congress, medical insurers such as Cigna (CI), Humana (HUM) and WellPoint (WLP) will benefit as ObamaCare is likely to be challenged. Managed healthcare providers such as United HealthGroup (UHN) should outperform for the same reasons. Even if Romney wins, if the Republicans do not take control of Congress, it is unlikely that ObamaCare will be repealed. In the short term, trading the insurance companies is rather risky as many of them have been negatively affected by Hurricane Sandy.
Finally, the easiest connection between the election and stock returns is that a Romney victory is a buy signal for high dividend yield equities. With interest rates so low, many investors seeking fixed income are already seeking out high yield dividend stocks. Under the current administration, the Bush Tax Cuts on dividend income will expire at the end of this year, allowing dividend income to be taxed at normal income (as high as 39% for some high net wealth individuals) as opposed to the 15% flat rate dividends are currently taxed at. Romney has pledged to extend this tax cut on dividend income, which will likely incentivize high net wealth individuals (and their money managers) to allocate a significant portion of their portfolios to high yield dividend equities as an alternative to bonds. This buying pressure will provide capital appreciation in addition to the attractive dividend yields.
The above chart shows some stocks with solid dividend yields. Companies such as Nokia (NOK) and Capital Product Limited Partners (CPLP) have higher dividend yields but are generally viewed as riskier investments. In order to profit from high net wealth individuals flocking to dividend paying “income” stocks, investors should invest in companies known around Wall Street as good dividend plays. Examples of these would be Altria Group (MO) or Conoco Phillips (COP).
Stocks to consider if Romney wins: MO, COP, CPLP, NOK, NOC, LMT, BA, CLR, XLF, GS, JPM
While some sectors will experience temporary rallies after Election Day, this election is not cause for a dramatic rebalancing of your portfolio. If you are looking to add positions however, a post-election rally can give your investment a margin of safety.
By: David Emami