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If Congress and President Obama fail to reach an agreement over the debt limit before the August 2 deadline, the markets could drop significantly. If the United States were to default, interest rates could rise, investors could lose confidence in the leadership and credit quality of the United States. Investors would also begin to worry about consumer confidence and the economy going forward. While most still believe that Washington will come up with a last minute solution, many are already surprised that it's even come this close to the deadline. Some fear that politics will beat out common sense and get in the way of an agreement. It makes sense to be prepared for both scenarios, both failure and an agreement being reached.
With this in mind, here are a few stocks that could get hit hard if the United States defaults. I plan to use any type of major market sell off (particularly in some of these stocks) as a buying opportunity. Here are the stocks with exposure to housing, the stock market, and interest rates, that could plunge and therefore create a short term trading or solid long term buying opportunity on any failure to reach a debt limit agreement.
Hartford Financial (NYSE:HIG) shares are trading at $23.61. These shares have a relative strength index of about 37 which indicates the shares are oversold. HIG is a leading insurance company. HIG shares have dropped with the markets and over storm losses and legal expenses. The 50-day moving average is $25.37 and the 200-day moving average is $26.29. Earnings estimates for HIG are $3.07 per share in 2011. HIG pays a dividend of about 40 cents per share, which is equivalent to a yield of 1.7%.
If the U.S. defaults, markets could plunge and that would cause the value of Hartford's investments to drop. However, any recovery in the markets could send Hartford shares up again in the long run.
Goldman Sachs Group, Inc., (NYSE:GS) shares are trading at $137.60. Goldman Sachs is a major investment banking company based in New York. The 50-day moving average is about $134.69 and the 200-day moving average is $154.73. Earnings estimates for GS are $11.29 per share in 2011 and $16.83 for 2012.
Much like the situation at Hartford, if the U.S. defaults, markets could plunge and that could cause the value of Goldman's investments to drop. It could also slow down activity in the investment banking area like initial public offerings. However, any recovery in the markets could send Goldman shares up again in the long run.
Toll Brothers, Inc., (NYSE:TOL) shares are trading at $20.55. Toll Brothers is a leading home builder. The 50-day moving average is $20.67 and the 200-day moving average is $20.03. Earnings estimates indicate a profit of about 2 cents per share for 2011 and 46 cents for 2012.
Interest rates could rise for mortgages if the U.S. defaults and weak consumer confidence in the future could also lower demand for new homes. Results have been weak at Toll and by looking at earnings estimates for the next couple of years, it's likely to be posting minimal profits for a $20 stock. Because of this, I would only buy a large drop in this stock and sell for a quick trade on any rally in this stock.
KB Home (NYSE:KBH) shares are trading at $9.06. KB Home is a leading home builder. The 50-day moving average is $10.72 and the 200-day moving average is $12.17. The shares are trading above stated book value of $5.76 per share. Earnings estimates indicate a loss of $2.56 per share for 2011 and small profit of about 7 cents for 2012.
As with Toll Brothers, if mortgage rates rise and consumer confidence declines, this would lower home buying activity and demand which would further impact the already weak results at KBH. Again, the home building stocks are only good for short term trade in my opinion. If these shares dropped hard, it could be an opportunity to buy for a quick trade.
Bank of America (NYSE:BAC) shares are trading at $10.00. The 50-day moving average is $10.81 and the 200-day moving average is $12.52. Earnings estimates indicate a loss of $2.56 per share for 2011 and small profit of about 7 cents for 2012. Earnings estimates are for a loss of 22 cents for 2011 and profit of $1.55 for 2012. This gives BAC shares a PE ratio of only about 6 times forward earnings. The dividend is 4 cents per share per year, which is a yield of about 0.4%.
Interest rates could rise for mortgages and this could further weaken demand for housing and bring another drop in home prices. More weakness in the housing market would delay the recovery for most banks. Bank of America stock looks cheap, but it could get cheaper depending on policy from Washington. Because of that, it only makes sense to buy in stages so you can average in, however, I believe this stock is a solid long term investment around these levels.
Headwaters, Inc. (NYSE:HW), is trading around $2.64. Headwaters is a building products company and is based in Utah. These shares have traded in a range between $2.59 to $6.41 in the last 52 weeks. The 50-day moving average is $3.15 and the 200-day moving average is $4.40. HW is estimated to lose about 77 cents per share in 2011 and lose 37 cents in 2012.
Headwaters makes a number of products that were hard hit in the recession and the housing crisis. Its light building products line includes manufactured stone, shutters, roofing, siding and window products. If interest rates rise, this would lower demand for housing and construction materials and it could also lower consumer confidence. These shares just hit a new 52-week low recently and could drop further as it does not appear to have found a solid bottom.
PulteGroup, Inc. (NYSE:PHM) shares are trading at $7.27. PulteGroup is a leading home builder. The 50-day moving average is $7.47 and the 200-day moving average is $7.53. The shares are trading above stated book value of $5.49 per share. Earnings estimates indicate a loss for 2011 and small profit of about 27 cents for 2012.
If mortgage rates move up on a U.S. debt default, demand for housing will weaken further and probably lower financial results at Pulte. I would only buy home building stocks like Pulte if they dropped hard and I would quickly sell an rally for a quick profit.
Disclosure: I am long HIG, BAC.
Source: 7 Stocks That Could Plunge if Debt Talks Fail