Happy QE II day. Bernanke was supposed to somehow calm the markets by telling us he's going to print a trillion dollars or two to bring us wealth and happiness. I have no idea whether or not this is going to work. There's no real precedent. We'd have to see how this sort of thing worked on other planets in the galaxy to help us guess if it might work here. But what we do know is this: with more money floating in the system, there will at least be a short-term period (and hopefully it will trigger a long-term virtuous cycle but that remains to be seen) where Americans feel flush and the stock market goes up.
But what stocks specifically? In general, I think people are safe in ETFs like SPY or QQQQ (particularly QQQQ which is tech focused and tech tends to do well when people feel flush).
By the way, as an aside, I do not think you can bet for sure on a weaker dollar. QEII could be the first cannon shot in a global devaluation war where each country becomes afraid to have the stronger currency (because it will damage their exports) so one at a time each country will devalue. Hopefully this won't happen but it won't work out for people who automatically assume the dollar falls versus other currencies.
So, which stocks will directly and immediately benefit from any additional quantitative easing?
): they insure mortgages and municipal bonds. Wilbur Ross is a huge investor. They dominate 97% of the sector (a tiny firm called Berkshire Hathaway (NYSE:BRK.A
) is the other 3%). They trade for about 4x earnings and with more money flooding the system, there will be less munipal defaults. Also with Treasury yields nearing zero, institutional investors who want more yield slightly up the risk chain will bet on municipal bonds. In my estimation AGO (which I own) should be trading at 8-10 times earnings, or close to $40 a share.
Lender Processor Services
): they provide the technology and data to banks to process mortgages. More easing means eventually more lending. More lending means more mortgages, means LPS software processing more mortgages for the banks. In addition to trading for just 8 times next year's earnings, I like the fact that the company has experienced some insider buying recently at prices slightly higher than where shares closed yesterday. At $29, this can easily see $45.
). What happens when you feel flush? You go out and buy a car! SAH is one of the biggest chains of used car dealerships. Car sales are up 7% this year but new car sales are down. Used car sales are going up because even when the money starts to trickle down and people feel a bit more flush, they are still cost conscious and want to save, for fear of any pending double dips. Used cars win, new cars lose. SAH could easily make $1.20 a share over the next year and at 15x earnings that would give it a price of $18, up from its current $11. Huge insider buying earlier this year, albeit at lower prices.
Kansas City Southern
). A freight rail transportation company. As global demand continues to return for commodities (and rail traffic is already up significantly year over year but this will spike even more with any quantitative easing), KSU will do well. In addition to its core business, which trades at about 15x forward earnings (down from an historical 22x), KSU is a good sum of the parts play. As one fund manager told me:
KSU owns a railroad bridge that goes into Canada from Michigan that was recently appraised at $1.2bn. KSU’s Mexico bridge does twice the traffic and is probably worth twice the Canada bridge – KSU owns 50% of the bridge, so there’s at least $1bn there. Second, KSU four years ago sold one-third of its stake in the Meridian Speedway railroad track (320-mile) for $300m, suggesting their 66% stake is worth $600m. Lazaro Port rail, assuming a value similar to other West Coast rail ports, is conservatively worth $1.5bn. That’s $3.1bn there, which doesn’t even include the other 6,200 miles of track KSU owns and all the cars it owns.
In other words, the sum of the parts adds up to the current market cap, so you get the business itself for free.
A trillion dollars in quantitiative easing. Let me be clear: I want some of that in my pocket. The stocks above will help me get it.
Disclosure: Long AGO