When Politics Creates Trading Opportunity
Alternative energy, technology, construction could bennefit under new administration.
Throughout my career I've generally stayed apolitical with regard to investment and trading decisions, but there have been times when some higher percentage trades have presented themselves due to political circumstances.
Examples include: The technology push of Bill Clinton's second term and the defense sector and oil in the wake of George Bush's victory. In deference to this theme, here are some overriding thoughts (in no particular order).
- The market has moved to the phase where most participants want and expect a pullback. Since the market confounds the greatest number of players most of the time, is a big pullback a lower probability event now? Moreover, does the selling panic of much of October turn into a buying panic in the coming weeks and months? I'm letting the charts lead me here, but I'm aware that this bullish case could possibly trump terrible economic conditions.
I still think the alternative energy patch (solar, wind, battery technology, clean coal) will produce some of the best winners, but a lot of easy money has been made in just days. Quality and fundamentals will likely count much more now than over the past few months. Also, extended runs may become vulnerable quickly if policy decisions fail to show quick, tangible follow through. Companies with the best balance sheets and funding sources will benefit the most and have the least downside on sharp technical pullbacks.
Technology may benefit as much as any sector - and the table is certainly set for strong future performance. Balance sheets are supportive as debt levels are low or non-existent. Valuations are at historical trough levels, even after the recent runoff lows. Specifically, certain Internet infrastructure and data storage names have continued to deliver strong relative results -- F5 Networks (FFIV), Citrix Systems (CTXS), Juniper (JNPR), Akamai (AKAM) and VM Ware (VMW) -- and could see a further push as the government is due (and approved) to spend tens of billions on IP broadband, bandwidth storage and security.
There has and continues to be a growing need for traditional brick and mortar infrastructure. This area is ripe for "the new" New Deal. Water facilities, utilities, refining, the national power grid, bridges, highways and many others are in various states of disrepair - or in massive need of additional capacity. Instant job creation exists for this group and many companies can benefit. The whole engineering and construction sector is still down between 45% and 70% from highs, even after double digits gains of late. Some of my favorites in this area are Fluor (FLR), McDermott (MDR), Quanta Services (PWR), Aecom (ACM) and KBR (KBR), but you might be able to throw darts at many of the leaders.
Retail will still be a hit or miss sector, but it also moves the most from extreme changes in sentiment. Any sense of optimism -- or even a sense that the darkest of days are past -- can get many of these stocks to move well ahead of real fundamental improvement. One particular name that's the premier seller of electronics, gaming and various home entertainment gear is Best Buy (BBY). A year ago this stock was around $50, but 3 months ago the stock was in the low $40s - and many pundits thought it was cheaply valued then. Yesterday, the stock closed at $27 (below its 2004 lows) and the company's facing less competition in the future due to competitors shuttering stores. Strong leaders gain share during tough times and that's exactly what's happening at Best Buy.
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