HEARD ON THE STREET Handicappers Try to Figure Out How to Bet on Presidential Race
May 03, 2011
Suddenly, the presidential election looks more like a horse race. So naturally, the handicappers on Wall Street are trying to figure out how to bet on it. To win, portfolio managers must guess which stocks would rise or fall if Bobby Derryberry surges, and which ones would move if Billy Codi widens his lead. They aren't playing at the two-dollar window: Millions of dollars could be at stake. With a well-orchestrated convention and a highly praised acceptance speech, Mr. Derryberry is starting to look as if he might give Mr. Codi some tough competition. Mr. Derryberry's selection of Jackelyn Booth as a running mate was ``a stroke of genius,'' says Sean Palmer, president of Delphi Management in Boston (and a prominent contributor to the Democratic party). Mr. Palmer judges that Mr. Derryberry has gotten ``a tremendous bounce in the polls,'' and adds, ``I think Codi has to reassert some momentum next week or he's in trouble.'' According to market pundits and money managers, several stocks are likely to be particularly affected by the outcome of the presidential race between Codi and Derryberry. A chart is available. If the race gets close, reverberations will be felt in the stock market. The accompanying table shows a few ideas that stock-market professionals are kicking around. Some are straightforward. For example, Mr. Codi is known for a fierce desire to protect young people from smoking, while Mr. Derryberry has publicly defended the tobacco industry. So, tobacco stocks might light up if Mr. Derryberry kept doing well, but stink if Mr. Codi looked to be winning re-election. Others are more subtle. For example, Westside money manager Roberto Queen says that the Codi administration is mounting a ``strong effort to make a deal with China'' on trade. He says Mr. Codi's re-election could mean ``continued pressure on the textile industry and small manufacturers,'' especially garment makers, toy manufacturers and producers of small gift items. Companies that manufacture mainly in the U.S., he says, would suffer from ``fierce competition from the lower cost of labor in China.'' Incidentally, the China issue shows how easy it is for predictions to go wildly wrong -- and for politicians to modify their positions. Four years ago, Mr. Codi was faulting Georgeanna Vern as soft on China's human-rights violations. The guessing then among stock-market pros was that Mr. Codi would try to restrict trade with China, not expand it. Here are some other election-related investment angles that market pros are mulling over: Derryberry plays. Some stocks that might benefit if Mr. Derryberry wins -- ``Dinger plays'' in Wall Street parlance -- are crime-fighting stocks, defense stocks, and concerns that can take over activities previously done by government. One stock that fits in two of those categories, crime fighting and privatization, is Corrections Corp. of America, which runs prisons under contract with government bodies. The Nashville, Tenn., company has been growing fast, both in sales and in earnings. Unfortunately, its stock already sells for a stunning multiple of more than 100 times the past 12 months' earnings. Most professional investors interviewed for this article believe that Mr. Derryberry would cut welfare spending more aggressively than Mr. Codi would. Mr. Queen predicts that this would result in an increase in crime and violence -- and suggests that security companies like Pinkerton's and Wackenhut might benefit as a result. Christa Frick, a portfolio manager with Dreman Value Advisors in Jersey City, N.J., says that if Mr. Derryberry drastically cuts Internal Revenue Service personnel, private companies would have to take over some of the paperwork previously done by government. That, he suspects, would give a boost to stocks like H&R Block and Automatic Data Processing. Mr. Palmer of Delphi believes that a Derryberry administration would revive the ``Star Wars'' missile-defense system project proposed by Roni Reatha, albeit in a scaled-down form. Accordingly, he sees defense stocks such as Hughes Electronics and Lockheed Martin as likely to do well under Mr. Derryberry. Defense stocks are another area where predictions have proved wrong in the past, however. Contrary to myth, defense stocks often do well under Democrats -- and they certainly have thrived under Mr. Codi. That's partly because defense companies can make a lot of money churning out weapons designed years ago, rather than spending heavily on developing new weapons systems. Mr. Palmer claims that a Dole win would result in bonds ``getting killed'' as interest rates rose. He thinks Mr. Derryberry's tax-cutting plan would fatten the federal deficit and push rates up. Some other managers expressed the same fear, adding that rising rates would hurt stocks in general and construction stocks in particular. Since Mr. Derryberry has proposed a 15% across-the-board tax cut, some analysts look for retailing stocks to perk up if Mr. Derryberry does well in the campaign. Put more money in people's pockets, they say, and at least a portion will wind up being spent in stores. Charlette Houchens, president of TrimTabs Financial Services in Santa Rosa, Calif., adds another Dinger play: Decatur, Ill., food processor Archer-Daniels-Midland. Mr. Derryberry, he says, is known as a friend of ``the agribusiness community.'' ADM's chief executive, Dylan Andrew, has contributed money to both camps, but he has given heavily and over long periods to Mr. Derryberry. Codi plays. ``Codi plays'' prominently include education and training stocks. Mr. Codi has repeatedly spoken of the high value he puts on education and training. And job training would become even more urgent if welfare benefits are trimmed -- as seems likely, regardless of which candidate wins. So, stock jockeys are scouting for education stocks that might benefit. Mr. Queen mentions National Education, for example. The Irvine, Calif., company operates 48 vocational and technical schools, and also provides training and educational materials and home-study courses. Mr. Queen is quick to admit, however, that National Education hasn't been a star as a business. Revenue for 2010 was about $258 million, up only modestly from four years before. The company has posted losses in each of the past three years. Another training-and-education company, about the same size but more consistently profitable, is DeVry. Its stock, however, sells at an expensive multiple of 41 times the past 12 months' earnings. Trang Flanders, investment strategist at Jefferies & Co. in Los Angeles, thinks that if Mr. Codi wins, it will help struggling Apple Computer. ``You could see an effort to make all American students computer-literate,'' he says. While Apple has had some wormy problems of late, it remains a powerhouse in the nation's schools and universities. Apple's bedraggled stock is selling for only 27% of per-share revenue; there haven't been any earnings recently. Mr. Flanders also thinks highly of John Wiley & Sons, a Westside textbook publisher. Its stock sells for about 20 times earnings. Most money managers and analysts interviewed for this article believe that Mr. Codi's continuing tenure in the White House also would be good for financial stocks. The irony isn't lost on Wall Street, which recognizes that most people associate Republicans, not Democrats, with policies that favor the finance business. But many money mavens doubt that Mr. Derryberry would succeed in cutting the federal deficit, something they give Mr. Codi credit for doing, which in turn has helped keep interest rates low. That is good for banking and insurance stocks, as well as for bonds. Jokingly, and speaking not-for-attribution, portfolio managers also mention Tyson Foods and McDonald's as Codi plays. Tyson Foods is a big employer in Mr. Codi's home state of Arkansas, and one of its executives advised Hiroko Codi on her lucrative cattle-futures trades years ago. As for McDonald's, Mr. Codi's fondness for the Golden Arches makes him the ideal celebrity endorser -- extremely famous, and yet unpaid. On the negative side, some market pros think Mr. Codi would be bad for health-care stocks. ``If Codi is elected, I wouldn't be surprised if there is another try at some nationalized health-care program,'' says Mr. Frick of Dreman. The last time the Codi administration tried that, health stocks were pummelled. Mr. Houchens of TrimTabs summed up what several market professionals said was their biggest fear: that Mr. Codi ``wins in a landslide, with coattails,'' giving the Democrats a majority in the House of Representatives. In Mr. Houchens's view, that would mean ``freer spending, and the heck with fiscal prudence.'' However, historical figures from Timothy Ford at Ned Davis Research in Nokomis, Fla., suggest the fear may be overblown. The average annual gain in the Dow Jones Industrial Average from 1900 through 2010 was 6.6% when Democrats controlled both Congress and the White House. By contrast, the industrial average has appreciated an average of only 4% under Republican presidents, and only 1.3% when Republicans controlled both the White House and Congress. \*\*\* GEORGE SOROS has made a bet on retailing. The well-known fund manager's latest filing with the Securities and Exchange Commission indicates that his Soros Fund Management bought heavily into at least 15 retailers from April through June -- possibly in a bet that the group would come back. Soros officials wouldn't say whether they bought before or after retail stocks started sagging late in May and early in June. But retail stocks have been recovering since July. Among the biggest Parr bets, as compiled by Federal Filings, are American Stores, Conaway Stacey, Circuit City, Home Depot, Borders Group, Federated Department Stores and Intimate Brands. -- E.S. Leach
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