Forget that President Obama “borrowed” his main theme for his third State of the Union address from the business bestseller, Built to Last. Or that he took credit for the recent momentum in the employment figures, like I predicted.
My aim today isn’t to focus on politics. Instead, I want to dissect the President’s address to reveal potential investment opportunities and risks.
I say “potential” because Congress needs to pass legislation before any of the President’s initiatives can really have an impact. And given the recent gridlock in Washington – and the fact that it’s an election year – there’s no guarantee our elected (mis)representatives will get anything done.
Nevertheless, let’s be prepared in case they decide to surprise us…
~ Get Defensive With Defense Stocks
The President opened his speech by rightfully thanking all the brave men and women that serve our country in the Armed Forces. He then noted we are now officially out of Iraq. This theme of troop withdrawal resurfaced later in his speech, revealing a key risk for defense-related stocks.
“…working with our military leaders, I have proposed a new defense strategy that ensures we maintain the finest military in the world, while saving nearly half a trillion dollars in our budget.”
Translation: Defense cuts are on the way. Massive ones. So we need to tread carefully when it comes to investing in defense stocks.
~ Bulk Up on Cyber-Security
Although the President only mentioned it in passing, the need to “secure our country from the growing danger of cyber threats” is serious. And any legislation to ramp up our defenses should benefit companies like Check Point Software (Nasdaq: CHKP), Fortinet (Nasdaq: FTNT), Juniper Networks (NYSE: JNPR) and Symantec (Nasdaq: SYMC).
~ Bet on Bigger Government and Washington D.C. Real Estate
Despite noting his request to Congress “to grant me the authority to consolidate the federal bureaucracy,” I counted at least two instances in which the President plans to expand government even more.
He wants to form a Trade Enforcement Unit and a Special Financial Crimes Unit. And if any of his other spending initiatives become a reality, no doubt they’ll require even more people to administer them.
Translation: More jobs are coming to Washington D.C. And more jobs in Washington D.C. means more demand for housing. So expect real estate prices in our nation’s capitol to keep rising. If you own an investment property there (lucky you) hang tight.
~ Pay Up, Payday Lenders!
The President didn’t mince words with payday lenders: “The days of signing people up for products they can’t afford with confusing forms and deceptive practices are over.” Yikes!
So before investing in companies like Cash America Intl. (NYSE: CSH), EZCORP, Inc. (Nasdaq: EZPW), First Cash Financial Services (Nasdaq: FCFS) and World Acceptance Corp. (Nasdaq: WRLD), I’d wait for details to emerge on how exactly he plans to crack down on these companies. If you already own shares, tighten up your trailing stops to be safe.
~ Let’s Try to Rebuild America (Again)
One of the key failures of the $787 billion stimulus package introduced in February 2009 was infrastructure spending. Most of the money allocated for such projects got caught up in endless red tape.
But the President is adamant about kick-starting the economy again, literally, from the ground up. As he said, “Much of America needs to be rebuilt.” So he’s planning on signing an Executive Order to eliminate “the red tape that slows down too many construction projects.”
Of course, Congress still needs to act in order to fund these projects. If they do – and the money gets allocated quickly – companies like AECOM Technology Corporation (NYSE: ACM), Emerson Electric Co. (NYSE: EMR), Jacobs Engineering Group Inc. (NYSE: JEC) and Tetra Tech Inc. (Nasdaq: TTEK) should benefit.
~ Yes, Even More Mortgage Reform
The President’s initial efforts to offer mortgage relief have failed miserably. The majority of homeowners that took advantage of the home loan modification programs have fallen back into default. But he’s determined to keep trying.
Now he plans to offer refinancing assistance by assessing “a small fee on the largest financial institutions.” While I don’t agree with the idea, I don’t expect it to put a major dent in earnings for financial institutions.
~ Beware of Multinationals
As expected, tax reform was one of the centerpieces of the President’s speech. And not just for individuals. The President slapped a big bulls-eye on the back of corporations, particularly multinationals.
“…No American company should be able to avoid paying its fair share of taxes by moving jobs and profits overseas. From now on, every multinational company should have to pay a basic minimum tax.”
Translation: Earnings for large multinationals earning more than 40% of profits overseas could be in line for a haircut.
~ Energy Independence, Here We Come!
The other centerpiece of the President’s speech was energy.
“I’m directing my Administration to open more than 75% of our potential offshore oil and gas resources.”
But don’t rush out to buy big oil production companies like Chevron (NYSE: CVX), ConocoPhillips (NYSE: COP) and Exxon Mobil (NYSE: XOM). The President is threatening to take a bite out of their profits. Instead of new taxes, he wants to end subsidies.
“We have subsidized oil companies for a century. That’s long enough. It’s time to end the taxpayer giveaways to an industry that’s rarely been more profitable, and double down on a clean energy industry that’s never been more promising.”
So clean energy is the ticket, according to the President. Well, I wouldn’t focus on solar and wind. The economics don’t even come close to working, even with hefty subsidies.
Not to mention, the government has a spotty track record for subsidizing clean energy-related companies. We all know about Solyndra. But there are others like high-tech battery maker, A123 Systems (Nasdaq: AONE). Even though it received at least $249 million in government funding, to date, it remains unprofitable. What’s more, since its IPO in 2009, the stock’s collapsed 90%.
Instead, I suggest focusing on natural gas. Why? Because supplies are abundant and the economics work, right now. Even though natural gas prices are plumbing decade lows, opportunities to profit certainly exist.
Next week I plan to share at least two such opportunities with you, so stay tuned.
Ahead of the tape,