The Obama Portfolio

Illustration by André Carrilho

Over the years, I’ve made a habit in this space of picking stocks for the year ahead on or around January 1. We’ve got no time for that now. Given the historic mess we’re in, people want to know where to put their money right this minute. Besides, Barack Obama has moved faster than anyone expected to announce his plans to lead us out of the financial wilderness, and those announcements create opportunities. If he’s going to shell out hundreds of billions of dollars to put people to work rebuilding the nation’s infrastructure, then I want to tell you which construction companies will benefit from that largesse. If he expects our nation to cut its dependence on foreign oil and go green, he’ll be instantly boosting the bottom lines of certain energy-related stocks. If you think he can solve the banking morass, how about the names of a few undervalued companies there, too?

But before we do any stock-picking, let’s focus on the firmament. The market’s been a miserable, awful place for months now, just a heartbreaker and a nest-egg cruncher. I know. That’s why I called for people to sell 20 percent of their stocks when the Dow stood at 11,300 on September 19 and then, with the Dow at 10,000, on October 6, said on the Today show that investors should take any money that they need for a major purchase in the next five years—house, car, college tuition—out of the stock market. I was pilloried at the time for inducing a panic, and I wish I had been wrong. But those few who didn’t label me the market’s Judas, and actually took action, sidestepped a 25 percent retreat, if you count from the recent bottom. Nevertheless, given that we are now down huge, with a new president-elect who actually wants to focus on rebuilding our economy, not Iraq’s, who cares about creating jobs, not just stuffing billions into bankers’ pockets, things are getting interesting on the long side again. While many regarded my sell calls as reckless—despite the fact that last I looked, it’s prudent to avoid losing a quarter of your retirement money—it would be just as reckless to stay so negative now, given the alacrity with which Obama is addressing the economy’s chaos and the sagacity of his focus on stopping unemployment before it goes double-digit on us.

In other words, happy days aren’t here again: The days of tossing your money in a Dow or S&P index fund and watching it go nowhere but up are long since over. I don’t expect any assault on the old highs anytime soon, if at all, during Obama’s first four years. I expect the holiday season to be dismal, and I see a slew of bankruptcies ahead of us in commercial real estate, travel, retail, restaurants, and the media. Still, Obama’s swift transition and desire to spend trillions to get us moving could prove that happier days will eventually beckon, at least for a handful of carefully selected companies. So, at last, it’s worth taking some sidelined money (note that I said some) and putting it back to work again.

Let’s take the new president at his word and bet that he really will put millions of people to work rebuilding America’s infrastructure. You don’t want to overthink this one. You can’t build without construction equipment, which means that Caterpillar, the world’s largest earthmoving company, will be a gigantic beneficiary of these programs. Here’s a company that’s so beaten up that it’s worth less than half what it was just a few short months ago. CAT’s stock was pummeled because of the sudden worldwide slowdown in growth, but major infrastructure orders from the federal government would go a long way toward reversing that. It doesn’t hurt that the company’s based in Peoria, the hardest-hit area of Obama’s home state.

Obama is committed to building out alternative energy, too. That means wind and solar. I say go with Quanta Services, a $16-and-change stock, which has major contracts to hook up alternative wind farms to the existing power grid and can channel solar power to where it does the most good. Quanta knows how to navigate the most difficult part of building out a new, cleaner energy system—placing the electric lines where they won’t be stopped or delayed by local governments. Quanta is one of those stocks that the hedge funds glommed onto as a way to play Obama’s triumph. Well, Obama won, all right, but the hedge funds are still getting crushed, and their endless selling has cut this stock to ribbons. It has lost two-thirds of its value even as it has continually topped Wall Street’s earnings estimates and is immensely profitable.

Ethanol may be the fuel that no one likes: It takes about as much energy to make as it generates and hogs 30 percent of the corn crop to produce about 3 percent of the nation’s gasoline. But Obama swears by it, so let’s stop moralizing and start buying companies that benefit from his insistence that we go grain instead of carbon. Deere & Co., the dominant agricultural-equipment company, has also seen its stock trampled by a hedge-fund stampede, a run that took it from the 90s to the 30s. It profits from any renewable-agricultural-energy initiative, including any that expands beyond corn. Besides being the farmers’ tool of choice, Deere helps developers build windmills and produces earthmoving equipment, so it’s a three-in-one Obama play. Added advantage: Like CAT, Deere’s based in Illinois, smack in Obama’s breadbasket, and Iowa farmers, so key to Obama’s primary triumph, stand to get more Deere handouts per capita than just about any state.

Another good ethanol play is Archer Daniels Midland, which creates and transports both ethanol in this country and biodiesel abroad, the latter being the other new fuel most likely to prosper under Obama. Like the other agri plays, ADM’s been crushed; you can get it at the same price it was before the ethanol craze began. It’s way too cheap not to own even without Obama in the White House.

Conservation’s the easiest energy initiative to implement, and nothing saves heat or electricity the way insulation does. Owens Corning is the name synonymous with the stuff. The OC’s also the biggest supplier of composite fiberglass used to make windmill blades, the strongest and cheapest material used to produce that renewable-energy source.

You have to figure that Obama’s going to lick the banking crisis. I’m not a fan of Tim Geithner, the Treasury secretary-designate, in part because he was a key Wall Street regulator as head of the New York Fed, an oxymoron given the totally unchecked recklessness of Bear, Merrill, Lehman, Citigroup, and just about everyone else in his purview. But he’s got the respect of Wall Street and the ear of Obama. After several miserable attempts by the Bush team to revive the banking industry, Geithner’s recent Citigroup bailout seems to have created a template that creates instead of destroys value. That means the worst of the banking crisis may at last be behind us, as Citigroup was the lone bank that could still pull down the whole financial system. The true winners now will be banks that can take advantage of the chaos and become dominant lenders. The two that will emerge as the healthiest will be Wells Fargo and JPMorgan. Both are well off their highs, and both have been able to establish national footprints, by purchasing ne’er-do-wells Wachovia and Washington Mutual, respectively, on the cheap. Success in banking now depends on a deep deposit base; Wells’s and JPMorgan’s purchases of these behemoth banks under stress gives them the deposit heft to triumph over other big, brand-name banks like Goldman Sachs and Morgan Stanley as well as any local or regional bank that now lacks the scale to compete. I could see Obama reinstituting the suspended tarp (Troubled Asset Relief Program) plan meant to buy the bad assets of banks, cleaning up not just the balance sheet of Citigroup but letting Wells and JPM off-load the awful and reckless loans of Wachovia and Washington Mutual while keeping their fantastic branch networks. With government guarantees on loans and billions of dollars placed in their coffers by current Treasury secretary Hank Paulson, these two banks will emerge as the most powerful financial entities in the world.

No matter how fast Obama works to combat a recession, companies that have little or no sensitivity to the broader economy should also do well. I like Gilead because it dominates the treatment of HIV, and U.S. health-care guidelines will most likely change in favor of much earlier treatment than currently suggested, perhaps raising the number of patients by more than 100,000, which will give a huge boost to earnings. The combination of weak or negative economic growth and sharply lower oil prices, meanwhile, will help the bottom line of firms like Procter & Gamble and Colgate-Palmolive, which use huge amounts of petroleum-based plastic to package goods that people still regard as necessities. Kraft should also prosper, with its strong stable of products like Velveeta and Oscar Mayer, previously dormant brands suddenly on fire because of low price points. Finally, Wal-Mart and Family Dollar Stores have picked up share from all other retailers, as price has become the predominant driver of consumer choice. How bargain-mad have American consumers become? Wal-Mart is the only Dow component that’s actually up this year.

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. 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.

The Obama Portfolio