Should you bail out of the stock market if a labor-friendly Democrat trumps a pro-business Republican in November? Seems like the natural move, doesn’t it? Except we were faced with this same choice sixteen years ago, and if you dumped the Standard & Poor’s 500, the best market gauge, when Bill Clinton took the White House, you would have missed out on one of the greatest Wall Street bull runs ever, a threefold gain over eight years. And if you bought the S&P 500 when George W. Bush won the presidential election, you’d have nothing to show for it. In fact, you’d have a small loss as of last week.
So, let’s dispense with the oversimplifying. Yes, we’ve got a Democrat who is skeptical of the market’s ability to do right by the people, and a Republican who puts his faith in markets, but the knee-jerk Democrat-means-sell/Republican-means-buy conclusion won’t be any more right than it was the last two times. That doesn’t mean there’s not money to be made on the election. The secret is to identify the individual sectors and stocks that will rise and fall under each hypothetical administration. This time, we’ve got four areas where we know for certain there’s a wide disparity between the candidates’ positions: energy, health care, finance and housing, and defense.
The first battleground will be Big Oil. While Barack Obama was less outspoken on the issue than his erstwhile opponent, he’s no friend of oil and gas, and he will seek to tax what he perceives to be Big Oil’s ill-gotten gains. I hate to tell anyone to sell these stocks, as no president can stop oil’s seemingly inexorable rise, but because of all the negative rhetoric, you’d have to trim both the major oils, like ExxonMobil and Chevron, and the big drillers, like Schlumberger and Transocean, under Obama. Companies with a natural-gas emphasis, however, could be a good play if Obama wins. Because natural gas is a relatively clean source of energy, those outfits are less susceptible to anti-oil attacks, and natural gas has a ways to go in price before it catches up with crude oil. I like Chesapeake and XTO, two big natural-gas wildcatters, as well as natural-gas drillers like Halliburton and Nabors.
An Obama victory would also be good for solar and wind power. My No. 1 solar pick would be First Solar, the only company in the field with a product that’s commercially viable. Unlike all of the other solar companies that everyone’s always speculating on, First Solar uses a technology that makes its panels cheap enough to compete with traditional energy sources. First Solar could also benefit from a series of orders that I am expecting soon from the major California utilities, which will be punished severely by that state’s utility commission if they don’t commit billions to renewable energy in the coming years. I believe Obama will call in First Solar shortly after the election to talk about how it can mass-produce panels for all utilities to help them supplement their traditional energy sources. In wind, there’s only one pure play right now, Broadwind, which I think could double over the next eighteen months on a surge in orders under a Democrat. It’s an unseasoned player, but with the Department of Energy predicting that there could be $40 billion spent on wind by 2030, when it projects 20 percent of our energy will be wind-based, Broadwind’s worth the speculation.
My energy pick in a McCain presidency is nuclear power. McCain genuinely believes that he has a shot at jump-starting the nuclear industry, a technology that almost every country on earth recognizes as the best way to cut carbon use but that we have all but shunned since Three Mile Island. President Bush favored nuclear power but barely lifted a finger to help the industry, resulting in only a few applications for new plants, none of which can be online for years even if they were green-lighted today, which they haven’t been. If you think McCain can win, and make political headway on an issue that has both national and local opponents, buy Shaw Group, a well-run infrastructure company with the best expertise in building nuclear plants.
Health care’s pretty simple. The federal government currently doesn’t use its clout as the biggest buyer of drugs to negotiate favorable prices. McCain has made noise about changing that, but it’s Obama who wants to beat some serious bargains out of Big Pharma, a move that would theoretically be a disaster for the major drug companies. But the pharmaceutical concerns’ stocks have already been pummeled in anticipation of an Obama win, so I’m less fearful of the group than I would be otherwise. In fact, they may be a good play if you believe Obama will win. In 1992, Clinton railed against the drug companies during the campaign but wound up taking little action against them, and they enjoyed a fabulous run during his two terms. I’d buy Merck and Schering-Plough right now. Two of the most poleaxed stocks, they could be coiled springs that bounce back no matter who wins the election. The health-maintenance organizations have also been knocked down ahead of the election because of price competition. They’ll get the ten-count under Obama, who views them as a major obstacle to better, cheaper health care. McCain will revive their fortunes. If you like his chances, you should like WellPoint, Humana, and UnitedHealth Group, too.
He may not know it, but Obama, not McCain, could be best for the banks, brokers, and home-builders, the three most downtrodden groups in the stock market. That’s because Obama would get behind massive federal relief for stressed-out homeowners struggling over higher mortgage rates and lower home values. To date, McCain and the rest of the Republicans have favored a laissez-faire approach to the issue. That sort of hands-off policy is traditionally good for banks and home-builders, but in this case it has led to bloated inventories from foreclosures and unsold new and old homes. Obama would side with the congressional Democrats, who would offer hundreds of billions of dollars in mortgage-loan guarantees, something that would actually end this nightmare. That would make everything from Morgan Stanley and Merrill Lynch to Bank of America and Wells Fargo gigantic buys (maybe that’s why Obama’s been getting the lion’s share of donations from Wall Street). I’d also snap up some home-builders, like Toll Brothers and Ryland Group. In fact, the only financial to avoid with a Democratic win would be Capital One, the big credit-card issuer. With the warnings and new regulations Obama wants on credit cards, Capital One would become the Philip Morris (now Altria) of the financials.
The knee-jerk Democrat-means-sell/Republican-means-buy conclusion won’t be any more right this election season than it was the last two times.
If you want to know where the easiest money will be made in an election, it will be defense. Presidents have a great ability to direct spending toward certain branches of defense, and we’ve got McCain’s Navy coming our way if he wins. Both General Dynamics and Lockheed Martin have the most to gain. General Dynamics is the better company, with the best Iraqi book of business (nothing like a hundred years of potential Iraqi arms dealing), but Lockheed Martin’s got the most lucrative naval contracts. If Obama gets in, on the other hand, certain defense companies will be laid to waste. Because a fast pullout would result in immediate order cancellations, for instance, Alliant Techsystems, the nation’s biggest bullet-maker, might be the single best short idea come an Election Day romp by the Democrats.
No election handicap would be complete without a long-shot speculative play. Presidents can rarely force big issues through Congress without a fight, but they can often sneak through smaller ones. Obama has endlessly emphasized the “next generation” of broadband, which would allow far greater use of the Internet for everyone. One company, Level 3 Communications, has the most spare broadband capacity by far. If Obama wins, it’s hard to imagine why anyone would stand in the way of his broadband initiative—there aren’t a lot of natural enemies to a faster, better Internet. That could spell a doubling in price for this company, which just reported its first good quarter in a half-dozen years.
In either case, the best thing the market can hope for is a clear victor well before the election. Nothing’s worse for Wall Street than having the White House hanging in the balance, because it detracts from what we do best, bidding up or slamming down stocks based on the underlying fundamentals of the companies themselves. Get Washington off the front pages, and you can bet we’ll have a better stock market than we have currently. That means if you’ve got conviction on who will win in November, you should place your bets now, before the big gains and losses have been taken.
James J. Cramer is co-founder of TheStreet.com. He often buys and sells securities that are the subject of his columns and articles, both before and after they are published, and the positions he takes may change at any time. At the time of this writing, he owned XTO Energy and Altria for his charitable trust. E-mail: [email protected]. To discuss or read previous columns, go to James J. Cramer’s page at nymag.com/cramer. Get all of James J. Cramer’s stock picks via e-mail, before he makes the trades, by subscribing to Action Alert Plus. A two-week trial subscription is available at thestreet.com/aaplus.