Non-Partisan Sectors Ready to Move
November 5, 2016, 6:00 am
We mentioned in our last Election Profits Bulletin that the slowly improving economy means certain areas are jockeying now for position to take off once the election uncertainty is behind us. Matt and I like to approach our research with a top-down strategy, beginning with a macro look at sector trends, and we’re already seeing attractive opportunities for when the time is right to buy.
Today, we’re going to examine the groups of the market in great position to perform well under either candidate. It may be hard to believe that such sectors exist given the nature of this campaign, but it’s true.
Healthcare: This may come as a surprise to you because the conventional wisdom here is that a Hillary Clinton win would add more pressure to the sector (specifically pharmaceutical and biotech stocks) given her adamant views on a drug pricing. Biotech stocks have really been brought down by her comments and the sector is now trading at just 13X 2017 earnings estimates – one of the lowest levels in recent years. While a Clinton victory could have an initial negative effect on the sector, we believe the recent pressure on the sector has now priced in much of the concern. Once the campaign rhetoric subsides, the attractive valuations, continued breakthroughs in the development of life-saving drugs, and the fact that change will be hard to come by will all lead to a great buying opportunity.
A Donald Trump win in November would likely result in an immediate relief rally for the sector and the buying should be sustained as the Clinton black cloud is removed. Either way, we could see a return to momentum that would be an attractive play in the coming weeks.
Aerospace & Defense: You may also be surprised that this is a sector that is poised to do well regardless of which candidate is victorious in the election. Clinton has heavily promoted budget cuts to defense spending in her campaigning, but we don’t think these are likely given the current climate. Not only would a Clinton win not hurt the sector, it could even supply a little boost. Meanwhile, Trump has already talked about his ambitions to strengthen the military, which should help some of the big names in the sector and make it an area to watch, especially for ETF-related plays.
Infrastructure: This is another area that stands to benefit from either a Republican or Democrat victory as both candidates plan to increase spending on upgrading the infrastructure system throughout the country. Clinton has promised to put $275 billion into infrastructure over a five-year period and Trump wants to create a public-private partnership, as well as private investments through tax incentives, to spur on $1 trillion in infrastructure investment over 10 years.
While they may not agree as to why spending should increase on infrastructure, the end result would be government money going to the improvement of everything from roads to municipal water projects – and it’s an area in dire need of help. For the last decade, the American Association of Civil Engineers has rated U.S. infrastructure and consistently gives it a failing grade. At a minimum, it will take billions of dollars just to put a Band-Aid on to get us through the next few years and both candidates should be ready to spend to not only facilitate the needed upgrades, but to also create jobs.
Leaders in Technology: There are two sub-sectors in tech that are taking off and neither Clinton nor Trump moving into the White House will change that. First is automation/robotics. This is an area that doesn’t make headlines during election campaigns, but it stands as one of the most innovative sectors ready to explode. This next step in the evolution of how things are made is still in its early stages, but that just creates incentive to fuel development as well as a ground floor for investors. It’s a win-win for everyone involved: lower costs to producers and more productivity for companies across a wide range of industries.
The other area is cloud computing. This may seem like an older concept since it has gone mainstream, but it’s actually still taking off and remains an innovative game changer. The move to the cloud is on big time throughout corporate IT departments and both candidates will support further expansion here.
Two to Avoid
Now that we’ve covered which areas are ready to outperform under either candidate, let us quickly share two areas we recommend you avoid: utilities and REITs (real estate investment trusts). Regardless of who wins, the Federal Reserve will likely raise interest rates in the coming months, which will be a negative for the dividend-paying sectors. The sectors are also trading at valuations that are above their historical average, making them even more susceptible to any selling.
We know the election has many investors on the sidelines, so we applaud you for being in the game. The last several months have been admittedly frustrating with the market stuck, but we expect things to get a lot more interesting soon, and there are definitely areas of opportunity. The next step is to drill down into specific plays that will profit from these trends. We’ll share our top picks in tomorrow’s bulletin, so stay tuned!