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All Contents © 2020The Kiplinger Washington Editors
By Jeff Reeves
| January 13, 2017
Gage Skidmore via Wikimedia
Donald Trump will be president within days, and the Republicans will control both houses of Congress. So to say that things will be different in 2017 than they were under President Barack Obama and a Democrat-controlled Senate is probably the understatement of the century.
The election was full of bombast and inflammatory statements, however, and in some ways it’s difficult to know what the candidates really stood for. So the question going forward is what tough talk was just posturing to get votes … and how will GOP legislators and President Donald Trump actually govern?
Or, if you’re an investor, the more important question to ask after that is, “What stocks will benefit from those policies?”
After looking at recent news and past promises, I think there are 10 clear winners under Donald Trump that will profit from a combination of positive policies and less regulation in 2017. These stocks are uniquely positioned to be direct beneficiaries from how Washington changes course in the next several months.
Yes, some picks have already run up after Election Day on speculation and a broader sentiment rally. But the real winners have staying power and won’t give up their gains.
If you’re looking to position your portfolio to profit from President Trump, here are 10 trades to make now:
Chriscobar via Wikimedia
Infrastructure spending was in the platform for both candidates during the race, so the most important factor isn’t Trump’s victory, but rather his rhetoric since Election Day.
Since November, there has been continued talk about how America’s roads, bridges and airports are aging and that some kind of infrastructure stimulus is necessary right away. That hints that this is not an empty promise, but something everyone in the GOP — and even some Democrats — will work toward in the New Year.
While multinationals like Caterpillar Inc. (CAT) are popular stocks when it comes to infrastructure, I don’t like them as much because they lack a direct link to local spending in the U.S. Instead, I prefer the mid-cap industrial Aecom (ACM) which generates over a third of its revenue directly from state, local and federal contracts here in the U.S.
After a $6 billion acquisition of rival URS in 2014, Aecom has plenty of scale and capacity to step up and profit from this trend. And while shares popped strongly right after Donald Trump’s election, ACM stock has faded away from its 52-week high in the past few weeks. This has provided a great opportunity to buy in before the next move higher.
longislandwins via Flickr
Financial stocks have been on a tear since Election Day. In November, the sector was fueled by the election of Donald Trump and the hopes of looser regulations that would allow for more loans and more profits in the New Year. Then, in December, an interest rate increase by the Federal Reserve gave financials another leg up on the hopes of higher interest margins.
If you are interested in banks stocks at all after these events (and you should be), then you need to have JPMorgan Chase & Co. (JPM) at the front of your list. It’s the largest U.S. bank by assets, and while it’s no stranger to scandals, it probably has the best reputation right now among the big banks after the Wells Fargo & Co. (WFC) scandal in 2016.
CEO Jamie Dimon has close ties to Trump and the GOP, recently joining a policy forum to advise the incoming administration. He was even rumored as a potential Treasury secretary before Trump named Steven Mnuchin as his pick.
And politics aside, the biggest bullish factor is simply the numbers; JPMorgan is riding seven consecutive earnings beats, proving this is not a stock that is simply benefiting from a short-lived pop in pro-bank sentiment. With higher rates and a more favorable regulatory environment under President Trump, a well-run mega-bank like JPM is a must-own in 2017.
While the trade in traditional banks is a popular one, one part of the financial sector that is not getting a lot of attention right now is the opportunity in business development companies — like Ares Capital Corporation (ARCC).
BDCs are popular options for investors chasing yield, because these publicly traded stocks operate much like investment funds. When you buy in, you are buying their portfolio of equity and debt investments. And since a company like Ares Capital typically loans to smaller corporations at a juicy rate of return, the combination of higher rates and looser regulations to boost access to credit are both important factors.
To top it off, if you believe in the “reflation” trade under Donald Trump and that small U.S. businesses will have it good, then those loans are sure to be paid back on time and investors should see fewer defaults — making Ares a win across the board.
Since ARCC has a close relationship with private equity giant Ares Management LP (ARES), that means ready-made access to financing in some big-ticket deals. And while there is always risk in these loans, numbers from 2016 showed improvement in non-performing loans even before President Trump was elected.
An additional plus is that Ares Capital is savvy about buying up smaller and sometimes even bigger rivals, consolidating power while debt is relatively cheap in an effort to maximize its control of the market.
Shares probably won’t move much, judging by the rangebound nature of this stock since 2010 after a snap-back from the Great Recession bottom. But remember, the steady cash flow generated by a portfolio of higher-interest loans fuels a yield of about 9% right now. Who needs share appreciation from ARCC when you can get huge dividend checks each quarter?
Financial stocks have been obvious winners since Election Day, but some segments of healthcare have also been hot trades thanks to Republicans pledging to dismantle Obamacare and revamp regulations in the industry.
UnitedHealth Group Inc. (UNH) is the most obvious winner for a world where Obamacare is no more. After all, UNH stock rallied nicely in 2016 on the simple news that, because it wasn’t making money in government-sponsored healthcare exchanges, it would be scaling back those efforts in the coming year.
Now that Donald Trump won the presidency and Republicans have taken the House, that momentum has only increased on the idea that UnitedHealth was ahead of the curve and best prepared to prosper in a new healthcare environment in 2017. UNH has rallied about 20% since the October lows, showing that there is still plenty of upside.
Remember, too, that while the dividend yield of UNH stock is just 1.6%, there is tremendous upside to payouts. Dividends are only about 26% of next year’s earnings and distributions have soared from about 3 cents annually in 2009 to $2.50 annually in 2016! Those who get in at a good price now could enjoy significant payout increases across 2017 and beyond.
The reality is that Obamacare is falling away under Trump, and private insurance is the only game in town. UNH is as stable as they come as a result — and thanks to increased profitability and the near-certainty of increased dividends in 2017, you can rely on this low-risk healthcare play regardless of the broader market environment.
Medical device companies are interesting because while they are often linked with Big Pharma names you’re familiar with, they operate in a very different way. In fact, I like to think of Stryker Corporation (SYK) as more of a power tool company than a medical company. It just happens to make tools for surgeons instead of plumbers or mechanics.
Stryker tools are very sophisticated, however, and are in high demand as they make modern techniques like hip replacements much easier on both doctors and patients. In fact, thanks to its patented medical tools, Stryker is now into its 10th straight year of revenue growth. Throw in an aging population of baby boomers who want to stay active in their golden years, and the joint replacement technology of Stryker is going to be a big growth business.
The business is straightforward, then, and you don’t have to deal with the same threat of patent protection and generic competition for the same chemical formula.
However, medical device companies like Stryker took a hit in the previous administration thanks to a 2.3% additional tax on medical device maker’s profits that helped defray the costs of Obamacare. Republicans have the will and the numbers to kill that tax in a hurry this year, and lifting that would make the margins even sweeter, and the profit potential of SYK even bigger.
Stephen Z via Flickr
The Second Amendment and gun owners’ rights have been a hot-button issue lately. But the sad reality is that mass shootings at schools and shopping malls haven’t stopped gun sales and won’t in 2017, either.
A pending Supreme Court nomination and a GOP-controlled Congress all but ensures a lack of gun control measures and easier regulations on the sale of firearms in the next few years. Gun manufacturers are in line to benefit as a result, and Sturm Ruger & Company Inc. (RGR) is perhaps your best opportunity to play this trend.
RGR stock fell off a cliff in November after the election of President Trump. Many investors saw Sturm Ruger reported “stronger than normal” sales in the summer during the run-up to the vote and figured that all the demand had been sated. However, anyone who has tried to bet on a peak in gun sales has been proven quite wrong many times in recent years.
Furthermore, shares have already rebounded 10% from their November lows, showing that the brief bottom is behind RGR and that share should move higher and not lower in the short-term.
If you have considered gun stocks a no-brainer trade but been afraid to chase them as shares ran up sharply across early 2016, now is your chance to buy in on the dip.
Travis Wise via Flickr (Modified)
President Trump’s view of crime is pretty simple — crack down hard. The President and Congress don’t have control over local police forces; however, it’s undeniable that state and city governments would take their lead from the federal level on many things and that a push to get tougher on crime would lead to a huge influx in prisoners.
Over the past year, the federal government has been getting out of the private prison game as they are allowing contracts with companies like CoreCivic Inc. (CXW), formerly known as Corrections Corporation of America, to lapse without being renewed.
But that may change in a hurry if we see a lot more inmates without capacity to house them in government-run facilities.
Fundamentally, private prison companies like CXW don’t look particularly attractive — and before Election Day were trading at multiyear lows. However, shares have rebounded sharply. And we could see revenue and profits push seriously higher in the coming years if Trump and the GOP follow through on their tough talk.
NWRGeek via Wikimedia
Donald Trump was vocal about his goals to increase coal use and production in the U.S., and that won him many votes in states like West Virginia. As he will be president and setting energy policy soon, it’s time to follow through on those promises with fewer regulations for coal companies and fewer subsidies for clean energy alternatives.
Consol Energy Inc. (CNX) is one of the nation’s largest coal companies, and has survived the upheaval in the industry by becoming very agile in its production operations. It will be a direct beneficiary of a decision to move back toward coal because of better sales, of course, but more importantly, CNX has developed methods to respond quickly to demand trends. In recent years, that has meant ramping down production quickly to save on costs. But it also will work the other way if we see boom times for coal in 2017 and 2018.
To top it off, Consol has diversified into natural gas operations that have been been more than adequately picking up the slack as coal has fallen out of favor. This is not a one-trick pony that needs coal demand to jump quickly, but rather a stable company that can weather the current environment until a coal-friendly regulatory environment takes shape once more.
Facebook Inc. (FB) was recently dinged after its Q3 earnings report at the start of November. But investors should see this dip as a rare opportunity to buy in, because longer-term, FB stock seems to do nothing but go up.
And seeing as Donald Trump loves social media and his unique brand of half-truths and inflammatory rhetoric are tailor-made for social media, you can be sure we are entering a golden age for Facebook in the coming year. After all, what is the news these days instead of anchors simply reading from Donald Trump’s Twitter feed or Facebook page?
Unlike the unprofitable Twitter Inc. (TWTR), however, Facebook stock is killing it on both the top and the bottom line. The stock is up by about 230% since its 2012 initial public offering — almost four times the return of the S&P 500 in the same period. And in the past 12 months, FB is up 30% while the S&P has gained 20%.
Many investors think the stock is too pricey or too overhyped, but that’s how momentum stocks work — particularly in tech, and particularly when you’re a company like Facebook that is wildly profitable and full of future potential. But the forward price-to-earnings ratio of the S&P 500 as a group is about 18 right now, and the forward P/E of Facebook is just 23 — hardly outrageous.
If you’re waiting for Facebook to crash, you’ll likely be waiting for a while. So don’t delay — buy the brief pullback before this stock continues to rally in 2017. As Donald Trump’s supporters prefer to get their “facts” from social media, you can be sure FB stock will be doing just fine no matter what mayhem we see in reality.
U.S. Navy via Flickr
Lockheed Martin Corporation (LMT) might seem a little counterintuitive, given that President-elect Trump just called out the defense contractor — again — about the pricing of LMT’s F-35 program.
Still, Trump also has called out the aging fleet of ships and aircraft within our military’s arsenal, and has pledged to reinvest in our defense system. That means a boon for defense contractors, and yes, that includes Lockheed Martin.
In fact, Lockheed is a win-win because in addition to retooling conventional military gear, it is a leader in 21st century warfare technology including drones and “smart” bombs.
The threat of war and military action is a constant under any president, but geopolitical concerns are on the rise all over the world right now and harsher language towards nations like China and Russia makes the need for military upgrades particularly urgent.
Beyond the 2017 outlook under Trump, you might think LMT stock suffered under President Obama and military cutbacks, but that’s simply not true. Right now, Lockheed is riding six consecutive quarters of year-over-year revenue expansion and saw its shares rise 20% across January through November 2016 before the vote was tallied.
This track record of success coupled with a more favorable environment in Washington bodes very well for LMT stock in the New Year. And in case you’re still worried about that Trump comment? Wall Street shook that off within hours.
This article is from Jeff Reeves of InvestorPlace. As of this writing, he held none of the aforementioned stocks.
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