Stocks for This Election Year
Forecasts about what the 2008 presidential election portends for stocks carry the same weight as the predictions by political pundits last summer that Hillary Clinton would run away with the Democratic nomination and that John McCain's run for the GOP nod was dead in the water.
Despite the hot air, elections matter and political news moves markets. S&P chief investment strategist Sam Stovall has identified three sectors that should benefit from election-year tailwinds.
Any spending related to maintaining bridges and roads will win support from candidates in both parties, says Stovall. That enhances the prospects of companies that can upgrade infrastructure.
One such company that S&P analysts recommend is construction-equipment maker Terex (symbol TEX). Terex has a $4 billion backlog of orders for its range of cranes, aerial work platforms and road-building equipment.
The company, which has a market value of $5.5 billion, competes with Caterpillar (CAT) and Deere (DE). But only a third of its $8.6 billion in annual revenues comes from businesses in which those giants compete directly. Terex thrives by craving out niches in markets the larger firms ignore.
The stock has taken a beating. The shares, which closed at $54.27 on January 16, down 1.8%, have dropped 40% since October. The stock trades at 8 times the $6.68 per share that analysts expect the Westport, Conn., manufacturer to earn in 2008. That's considerably less than Caterpillar's price-earnings ratio of 11 and Deere's P/E of 15.
"Terex remains the most compelling in the group on a risk-reward basis," says Credit Suisse analyst Jamie Cook, who rates the stock "outperform" and has a 12-month target price of $80.
Voter turnout in early primary states and national polls point to a Democrat being the next occupant of the White House. Paradoxically, Stovall says, a Democratic administration would make it easier to enact energy legislation that could increase offshore drilling. That's because a Democratic-sponsored energy law would remove the perceived stigma of Republican favoritism for oil producers.
"More drilling would be given the green light by Democrats than if it was proposed by the Republicans," Stovall says. If that happens, Noble Corp. (NE), a Sugar Land, Tex., energy-services company, is primed to benefit. The firm already has a $7 billion backlog of drilling jobs and a well-maintained fleet of rigs.
Morgan Keegan analyst J. Michael Drickamer says Noble remains "one of our favorite names, with exposure to global operations and deepwater drilling, particularly as the stock remains undervalued compared to its deepwater peers."
Hurt by falling crude-oil prices, the shares closed at $48.27 on January 16, down 4.2%. They trade at less than 8 times the $6.27 per share that analysts expect Noble to earn this year. Drickamer rates the stock "outperform."
Managed-care providers are among the usual suspects rounded up and jailed in a hypothetical Democratic White House. But Stovall sees prospects for these companies improving regardless of which party is in the Oval Office.
Why? Because, he says, many of the health-care proposals by Democrats and Republicans will encourage more people to buy private health insurance.
CIBC World Market analyst Carl McDonald says he doubts that nearly nonstop electioneering will hurt managed-care stocks. "The perceived impact on the group of the 2008 presidential election is considerably overblown," he says. "Elections have never really mattered in the past, fundamentals do."
McDonald says his favorite managed-care stock is Health Net (HNT) because it trades at a big discount to the rest of the industry. The Woodland Hills, Calif., company has a robust Medicare business and provides health insurance to 3 million members of the military and their families.
The stock, which closed at $52.59 on January 16, up 0.9%, trades at 13 times estimated 2008 profits of $4.17 per share. By contrast, the typical managed-care stock trades at 16 times earnings. McDonald rates Health Net a "sector outperformer."
On the whole, though, presidential-election years are not great ones for the stock market. Standard & Poor's 500-stock index has gained an annualized 8.6% in White House-election years since 1945. Over the long term, the index has returned 10.4% annualized.