Fri Apr 15 2016
Live Index (1448 articles)

Stocks to Buy and Sell If Bernie Sanders Is Elected

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We decided it would be fun to take a look at what stocks might be winners and which might be losers under each of the four leading presidential candidates. We focused primarily on their economic and tax plans to look at what changes might affect the investment world. We’ll go through the candidates in alphabetical order by first name – Bernie Sanders, Donald Trump, Hillary Clinton and Ted Cruz. Before we dive into our picks and pans for a Sanders presidency, I want to explain a little bit about how we will approach things.

Throughout this series we are going to assume that candidate’s economic plans, as they are defined now, are enacted as is. Obviously, with a divided Congress, no plan will be enacted exactly as the candidate presents it today. Not only that, if politicians are known for one thing, it’s lying. For all we know these proposals may not even be close to what the candidates actually plan on doing. Additionally, we are also not the “numbers police” and are not here to debate whether a candidate’s numbers add up (you want to enact $ 9 trillion in tax cuts, go ahead, we will analyze that) and we are not “Very Serious People” deciding whether a plan is “realistic” (you want universal healthcare or a giant wall, we will analyze that). We are going with what the candidates say they will do.

Even though nothing the candidates present as is, the plans usually do at least show the direction that candidates are leaning. For example, Cruz and Trump are proposing huge tax cuts. Is a flat tax really likely to be enacted? No, but it’s likely if elected Cruz would push hard for some type of tax cut. Likewise, is Bernie Sanders’ $ 5 trillion infrastructure plan likely to be enacted as is? No, but if elected he’s likely to push very hard for increased infrastructure spending.

So, although the information about the candidates plans we have to go on is imperfect and subject to change, we still think it’s useful to look at who the winners and losers might be under their plans.

Without further ado, let’s take a look at Sanders and what his plans are for the economy.

Bernie Sanders has a very detailed plan to radically reshape the economy. He’s proposing $ 1 trillion in infrastructure spending over the next five years, a $ 5.5 billion youth jobs program, free college education and raising the minimum wage to $ 15 per hour. Additionally he’s promised to reverse free trade deals to protect American manufacturers, break up the big banks and replace Obamacare with a single-payer healthcare plan by expanding Medicare to cover everyone. He’s also promised to increase union membership and expand Social Security.

To fund his proposals, his plan includes numerous tax increases. The most notable increases include a speculation surcharge tax on Wall Street, and expansion of the payroll tax to cover universal healthcare, creating additional tax brackets for higher income levels as well as raising income taxes for those in the higher income tax brackets. Other tax increases include a progressive estate tax, tax on offshore income for businesses, hiking the capital gains tax, ending various loopholes (e.g. the carried interest loophole), and removing the income cap on Social Security taxes.

Most of Sanders’ tax burden falls either on corporations or on the wealthy with the exception of his 2.2% payroll tax increase to pay for universal healthcare. Because corporations and the wealthy have a lower propensity to consume, Sanders’ taxes will likely not cause a substantial drag on the economy. There are two issues that do give me pause. His 2.2% payroll tax increase is a tax increase starting with the first dollar someone earns and will hit low wage earners much harder then higher earners.

Second, the expansion of the employer side of the payroll tax will make hiring workers even more expensive and could slow job growth. Balancing out those issues are the fact that health care costs are a substantial amount of spending for lower earners (if they even have healthcare coverage at all) and a substantial part of the cost of hiring new employees. Sanders and others have pointed out the efficiencies a single payer health care system will in aggregate cost workers and businesses less money, so there should be no net economic drag from the tax hikes. It’s a bit beyond the scope of this article to dive into that issue more. Furthermore, any such drag from the increase in payroll taxes would be offset by the spending portion of his plan. The sheer size and scope of his plan would boost GDP growth to over 5% in the first year with growth trailing off as both his infrastructure plan winds down and slack in the labor market is reduced.

Under Sanders’ plans, the consumer, particularly lower income consumers would benefit tremendously, while the ultra wealthy and businesses that cater to them may suffer. Let’s take a closer look at who wins and who loses if we have President Sanders.

Buy:

Construction and engineering companies

Let’s start with Sanders’ biggest proposal. $ 5 trillion over five years spent on infrastructure. For years many construction and engineering companies have suffered with slow growth and uncertain funding for major infrastructure projects. This would change drastically under Sanders. You name a construction and engineering company, and it would likely do well. Companies like Flour (NYSE:FLR), Emcor (NYSE:EME), Jacobs Engineering (NYSE:JEC), Granite Construction (NYSE:GVA), and well, just pick any name in the sector. With the big (and small) construction companies flush with cash and buying new equipment, it might also be enough to offset slowness in the Chinese market for heavy equipment makers like Caterpillar (NYSE:CAT) and John Deere (NYSE:DE), as well as diesel engine manufacturer Cummins (NYSE:CMI).

Consumer focused companies

Sanders’ combination of direct job creation plans (infrastructure, jobs program), a rapidly growing economy and higher minimum wage will be a huge boon to consumers. More people working and higher wages should lead to stronger consumer spending. Retailers already paying higher wages such as Costco (NASDAQ:COST) should benefit greatly. Basically pick any company that benefits from strong consumer spending. But, beware of any company that relies on low priced labor. Consumer staples companies like Pepsi (NYSE:PEP) and Proctor & Gamble (NYSE:PG) should do well. Automakers with strong entry level brands such as Ford (NYSE:F), General Motors (NYSE:GM), Honda (NYSE:HMC) and Toyota (NYSE:TM) should do well as they have large unionized workforces paid higher wages (or perhaps more accurately high union representation in the sector has kept wages higher). Homebuilders that cater to first time buyers like DR Horton (DHI) and PulteGroup (PHM) should prosper as construction workers are generally paid above minimum wage, so costs shouldn’t rise substantially.

Big banks

Sanders has been a notorious critic of the financial industry, so this suggestion probably looks out of place at first glance. Bear with me for a minute. Consolidation in the financial industry has produced gargantuan institutions with the banking sector more heavily concentrated now than before the crisis. In fact, the big banks are so big and unwieldy that there are several studies showing that they are likely suffering from diseconomies of scale. Breaking them up would probably be a net benefit to both the banks and their shareholders. In fact, activist investors are beginning to push for just that with Carl Icahn (Trades, Portfolio) taking a stake in AIG (AIG) and urging them to split up. Sanders has proposed putting a size cap on banks and letting them determine how to get under it. This is a very market friendly proposal, the government won’t be coming in and telling the banks what stays and what goes. Instead shareholders, boards, executives and activists will likely all have a hand in remaking the sector.

Finally, while Bernie has been a proponent of harsher penalties for banks breaking the law, the statute of limitations has expired on most of the crimes from the financial crisis era (not to say that there hasn’t been bad behavior since). Because of Sanders’ proposed financial transactions, tax investors may want to look at financial institutions with significant traditional banking operations such as Wells Fargo (WFC) or Bank of America (BAC) over investment banks such as Goldman Sachs (GS).

Education companies

Sanders proposal to expand access to higher education will likely be a boon to any company producing goods or services for the education market. With what is sure to be a huge influx of new college students, beaten down textbook and educational services company Pearson (PSO) should do well (their largest market is the U.S.) as well as companies like Scholastic Education (SCHL)and publisher John Wiley & Sons (JW.A).

Others

Sanders has also proposed renegotiating free trade deal; however, we will save our analysis of what might happen under that scenario for the Donald Trump section, since Trump has been a more forceful critic of those deals and has even floated the idea of imposing tariffs.

Sell:

Health insurers

This one should be pretty obvious. Sanders is basically proposing to do away with the private insurance market by expanding Medicare to cover everyone. I’m sure that pockets of the private insurance market would remain, perhaps in the form of platinum plans catering to the wealthy or supplementary coverage plans. Companies like UnitedHealth Group (UNH), Aetna (AET), andCIGNA (CI) would undoubtedly suffer greatly.

Big Pharma

Right now Medicare is prohibited by law from negotiating drug prices. Under Sanders it’s pretty certain that Medicare would follow in the footsteps of most other industrialized nations and negotiate bulk pricing on prescription medications. The U.S. pays some of the highest prices for drugs in the world, so it’s a virtual certainty that companies like Pfizer (PFE), Merck (MRK) orBristol Myers Squibb (BMY) will see their bottom lines hurt by pricing pressures.

Low wage companies

This is a tricky one. Sanders has proposed raising the minimum wage to $ 15, which will certainly cut into the profits of many companies relying on low wage workers. On the other hand, Sanders’ economic proposals should lead to substantially higher growth and a rising tide lifts all boats. Will increased sales growth be enough to offset lower margins? I’m not sure, but why not play it safe and stay away from those types of companies that rely heavily on low wage workers. Companies like Wal-Mart (WMT), McDonald’s (MCD), Wendy’s (WEN), and maybe even Amazon (AMZN)(their warehouse pickers’ starting wages are below the proposed $ 15 minimum) could see their costs grow faster than their profits.

For-profit education

I’m not sure where for-profit education companies would fit in a landscape of free higher education. Elite private non-profits like Harvard and Yale will certainly still thrive and many other good, private non profits should do fine as well. But who would pay money to attend DeVry (DV) or Strayer (STRA) when a state school would be free? This sector could disappear entirely.

About the author:

President and Portfolio Manager of Strubel Investment Management LLC, a value-oriented, independent, fee-only Registered Investment Advisor (RIA) based in Lancaster, Pennsylvania.

Visit Ben Strubel’s Website

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