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Stocks to Trade for a Post-Election Gridlock - 17329 views
The midterm elections are just eight days away, and it's no surprise that Wall Street is looking for ways to make money off of this key event. Intuitional investors are preparing to position themselves for any potential change in the political environment in Washington -- a change that could come in the form of some big Republican victories, potentially giving the party control of at least the U.S. House of Representatives, if not also the Senate.
Currently, online betting Web site Intrade.com is predicting the likelihood a Republican takeover of the House at around 88%. For the Senate, the likelihood of a Democratic victory is predicted at 57%, down from the 70% odds that had been seen in September. At Intrade.com, people are putting cold hard cash on the line to shape these predictions -- and, as with stocks, when people vote with their dollars, it tends to lend to the accuracy of these predictions.
With the odds calling for a Republican victory in the House but not the Senate, market players have to start thinking about how to trade the markets for a potentially gridlocked Washington. A gridlocked Washington could lead to two major things: easing in financial regulations on the banks, and reform of the mandatory health care bill that Obama passed earlier this year. I see lots of potential for changes in these two areas because they are receiving so much attention from the campaigns of many of the GOP candidates this election cycle -- particularly health care reform.
In terms of reforming the regulations on the financial sector, Republicans have notoriously been pro-Wall Street, so it’s not a stretch to think they’ll push for business-friendly policies to help the banking sector.
Whether you agree that anything will actually change is, at least for the moment, irrelevant because Wall Street will only care about the perception that things could change. That perception is what will move certain stocks and sectors as soon as we have tallied all of the votes and crowned the political winners next week.
With this mind, let’s a look at a number of stocks that could see sharp moves higher once the midterm results are final.
Health care stocks make the most sense to me for trades if the Republicans gain big wins from the midterm elections. These stocks are poised to experience a relief rally off a Republican win because Wall Street will perceive a GOP victory as a mandate for repeal of the costly public health insurance package that Congress passed earlier this year.
Market players who believe there's a high chance of a Republican victory might want to look at playing the health maintenance organization (HMO) stocks. The top names in the sector to consider are WellPoint (WLP), Cigna (CI), Humana (HUM), Aetna (AET), Coventry Health Group (CVH) and UnitedHealth Group (UNH).
From a technical standpoint, Humana and UnitedHealth are the strongest names in the sector, with both stocks trading near 52-week highs. These two could easily break out to new highs if traders decide to jump in and play these stocks into and right after the midterm elections.
WellPoint has a cash rich balance sheet with $18.59 billion in cash on the books and $9.3 billion in debt, which gives it a net cash amount of $9.29 billion. WellPoint is also the most beaten-down name in the group, with the stock trading just 10 points off its 52-week low. Cigna and Coventry Health Group are two of the cheaper names in the group, with the former trading at a forward price-to-earnings of 7.98 and the latter trading at 9 times forward earnings.
As for market players who think a GOP victory will mean the end of the onslaught on banks and Wall Street, they should considering buying the beaten-down bank stocks heading into the midterm elections.
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A lot of people are going to hate this recommendation because of the current mess surrounding the banking stocks with the massive foreclosure problems. But a Republican victory could be the first step toward fixing this ridiculous foreclosure problem -- or at least the market will likely perceive it that way. I see these stocks as presenting a great trading opportunity but not necessarily great long-term investments at this point.
Since these stocks have been major laggards during the recent market rally, it’s not unreasonable to assume that shorts are leaning heavily on them. A major short-squeeze rally could be sparked off a Republican win, which would move these bank stocks up sharply.
JPMorgan Chase seems to be hinting that regulations in Washington are going to start easing for the banking sector. Just today, the banking giant announced it was taking a majority stake in $6 billion Brazilian hedge fund Gavea Investimentos. Clearly, this move by JPMorgan is a way for it to get a piece of the fast-growing BRIC nations, but it also shows that JPMorgan is potentially less worried about how Washington might tax and regulate alternative investments.
Citigroup is flush with cash on its balance sheet, with $753 billion of total cash and $666 billion in total debt, giving it a net cash amount of $87 billion. Citigroup is also cheap, trading at a book value per share of $5.60 and the current stock price is $4.16 a share.
I would also look for a rally in Goldman Sachs Group (GS). Obama and his administration have been relentless attackers of Goldman. Some of those attacks have been warranted, but Wall Street knows that Republicans are going to be much friendlier toward Goldman Sachs if they win.
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Another segment of financial stocks that could benefit from a Republican win are private-equity and hedge-fund-related stocks. The two top plays to consider are Blackstone Group (BX) and Fortress Investment Group (FIG). Again, Republicans are flat out friendlier toward Wall Street, and private equity and hedge funds are the engines that help Wall Street run and grow.
Both of these stocks could see a huge boast if a Republican win can translate into any meaningful change in the capital gains tax. Just for example, California gubernatorial candidate Meg Whitman has proposed that the state tax only income and not capital gains. Hedge funds have been fighting in Congress over counting their income as capital gains, which in turn would tax them at a much lower rate. Eliminating tax on capital gains as ordinary income would be a boon for private equity and the entire hedge fund sector.
To see more potential gridlock picks, check out the Top Washington Gridlock Stock Plays portfolio on Stockpickr.
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At the time of publication, author had no positions in stocks mentioned.
Roberto Pedone, based out of Windermere, Fla., is an independent trader who focuses on stocks, options, futures, commodities and currencies. He is also an outside contributor to Beconequity.com and maintains the website Maddmoney.net, which he sold to Blue Wave Advisors in 2008. Roberto studied International Business at The Milwaukee School of Engineering, and he spent a year overseas studying business in Lubeck, Germany.