With the recent inauguration of Barack Obama as the forty-fourth President of the United States and a very heavily democratic Congress, we are likely to see significant changes in both the political and economic environment within our country and possibly across the globe. In a piece I wrote last year for Bottom Line, I discussed what some likely macro themes would be depending on whether McCain or Obama became the next President of the United States. Now that we are a few days into the new Obama administration and clearly have a more difficult fiscal and economic position as compared to last year, I am updating some of my thoughts and including some potential small cap investment ideas for the next administration. In coming days, I will be posting additional thoughts on the specific names mentioned in this article to the subscriber section of my blog.
- Environment/Alternative Energy: During Obama's campaigning, he discussed spending upwards of $150 billion over 10 years to develop clean-energy alternatives. Based on early indications from the stimulus bill and other thoughts, I would suspect that if anything, that number is conservative. All that being said, I still think it’s very difficult to figure out exactly which alternative energy will take off (if any) and therefore I would look at the consulting firms such as Exponent (NASDAQ:EXPO) and Ecology & Environment (NASDAQ:EEI) for investment. I am somewhat concerned by solar names as they have a significant reliance on high-energy prices along with subsidies from various governments and I would therefore be cautious on those names. That being said, I think the green movement will continue for at least four more years.
- Infrastructure: I don't think this pick will surprise anyone but certain infrastructure companies should benefit from increased government spending and then as we get into the later years of the Obama administration by an improving economy. A couple of small cap companies I like here are Meadow Valley (MVCO) and Perini (PCR). Infrastructure should also be helped by increased federal aid to states.
- REITs: I would be careful with these in the short term but over the cumulative four-year period where Obama is in office these are likely to outperform. Clearly, with the large amount of money being poured into the economy by the government, taxes will have to rise at some point. Income from REITs is not eligible for the lower tax rate on capital gains and therefore a closing of the gap between income tax rate and capital gains rates could be beneficial for companies in this space. An interesting company here is Entertainment Properties (NYSE:EPR), who is focused on entertainment properties such as movie theaters which have held up relatively well in the current difficult economic environment.
- Generic Drugs: It is very possible that Obama will work to lower prescription drug costs through the negotiation of prices with pharmaceutical companies. This could benefit generic companies who offer low-cost medicines to consumers. Some potential winners are Teva Pharmaceuticals (NYSE:TEVA), Watson Pharma (WPI) and potentially smaller names such as Caraco (NYSEMKT:CPD) or Mylan (NASDAQ:MYL).
- Lower end consumer goods: The potential of increased tax breaks on lower income individuals could help some of the retailers focused on this audience such as Aaron Rents (RNT), 99 Cents Only Stores (NYSE:NDN), Family Dollar Store (NYSE:FDO) and potentially even McDonald's (NYSE:MCD).
- Education: Obama has made it clear that he would like to increase spending on education and at the same time increase potential tax write-offs for those attending universities. The issue with many of the education stocks is that many have had a nice run-up already and are trading at fairly high P/E levels. Therefore, I would hold off on these names for now but the universe which includes Apollo Group Inc. (NASDAQ:APOL), Career Education Corp. (NASDAQ:CECO), Career Education Corp. (NASDAQ:COCO), DeVry Inc. (NYSE:DV), American Public Education (NASDAQ:APEI), ITT Educational Services Inc. (NYSE:ESI), Strayer Education, Inc. (NASDAQ:STRA) and even Washington Post Co. (WPO) (Kaplan) could be attractive if they were to decline 15-20% from current levels.
I would also take a look at many of the cash-rich companies that have low debt loads, which populate the market in high numbers at the present time.