Romney has an 80% chance of losing, according to Nate Silver of NYT. But the market isn't pricing this in. Journalists make money from reporting on a neck-and-neck race, so they are trying their best to make 80% look like 50%. This misinformation creates superior odds for those who bet against it.
The following picks represent a diversified, actionable opportunity to generate significant returns on the election next month. If you disagree with Silver's projection, feel free to bet opposite.
As Jim Cramer points out, a Romney win would favor coal companies like American Electric Power (NYSE:AEP), Southern Company (NYSE:SO) and Union Pacific (NYSE:UNP). These companies may have bonus alpha from shorting because Cramer specifically suggested them as picks for those who think Romney will win.
"If there's one sector that's likely to gain from a Romney win, it's defense" says Russ Brit, MarketWatch Los Angeles Bureau Chief. Romney would spend more on the military. Lockheed Martin (NYSE:LMT) is extra-exposed because Romney wants to order jets from them. Also short Northrop Grumman (NYSE:NOC), and Cramer's pick General Dynamics (NYSE:GD).
Schlumberger (NYSE:SLB) and National Oilwell Varco (NYSEARCA:SLV) are oil companies named by Cramer in relation to Romney's policies on drilling. There are additional picks in this space, but the above are ideal for capturing election alpha. War with Iran is considered more likely under Romney, which means oil's price is inversely correlated with an Obama victory.
Short Regional Banks
Huntington Bancshares (NASDAQ:HBAN) and KeyCorp (NYSE:KEY) are not attractive enough on a valuation basis to make it into Cramer's Charitable Trust, but he suggests them to Romney buyers. This makes them ideal shorts.
Short More Banks
Russ Brit singles out JP Morgan (NYSE:JPM) as a key beneficiary of Dodd-Frank being repealed under Romney. Brit quotes Hugh Johnson, whose company consults on or manages almost $2BB in assets: "Of all the sectors I look at, [banking] might be the most affected".
Bank of America (NYSE:BAC), Morgan Stanley (NYSE:MS) and Citi (NYSE:C) rallied in correlation with a strong debate performance from Romney. An Obama victory will be bad for their stock prices in November.
Short Health Insurance
Aetna (NYSE:AET), UnitedHealth (NYSE:UNH), and WellPoint (NYSE:WLP) have rallied in hopes that Romney would repeal Obamacare. Don't short (consider buying) Cigna (NYSE:CI) which is the most undervalued in this group, according to David Einhorn.
Short Cisco (NASDAQ:CSCO)
From Russ Brit: the company wants to repatriate a lot of cash, and could do so advantageously under tax rules vocally proposed by Romney. Cisco is also a nice proxy for business investments in technology; although it is debatable what Obama's victory will mean long-term, in November I think it will mean pessimism towards business investments.
I am uncomfortable with an isolated bearish view on Cisco. For diversification, one might as well also short Hewlett Packard (NYSE:HPQ), not because Romney is a friend of CEO Whitman, but because the company is considered overvalued by analysts, and because Whitman lacks competence.
Long Alternative Energy
Romney specifically criticized Tesla (NASDAQ:TSLA), the leading electric carmaker. First Solar (NASDAQ:FSLR) would benefit from an Obama election and is big enough to survive secular over-supply challenges in its industry.
Alan B. Lankz tells Brit that Exelon (NYSE:EXC) could see a 10% boost on Obama election, because it has invested in renewable energy. Not mentioned is the fact Obama and Energy Secretary Chu have a historical friendship with the company in nuclear power.
The Environmental Protection Agency is part of the executive branch. Under Obama, its requirements for bio-diesel are bullish for producers. Renewable Energy Group (NASDAQ:REGI), Amyris (NASDAQ:AMRS), Sino Clean Energy (OTC:SCEI), Syntroleum Corporation (NASDAQ:SYNM), Gevo Inc (NASDAQ:GEVO), Pacific Ethanol (NASDAQ:PEIX) and Biofuel Energy Corp (NASDAQ:BIOF) are buys creating sufficient diversification in this unpredictable space.
Obama will encourage manufacturing in America. Brit suggests these buys: Deere (NYSE:DE) for rebuilding infrastructure, Caterpillar (NYSE:CAT) and other industrials in general, and Alcoa (NYSE:AA) which makes aluminum (presenting an alternative to less green metals like steel).
Obama advocates a consumer middle class. I like Capital One (NYSE:COF) as it focuses on consumer banking.
COF can help offset the bank shorts listed above. Further offset is available through a long position in Goldman Sachs (NYSE:GS), a bank known for coming out ahead when everything is going wrong in its industry.
Romney's win in the first debate hurt the following hospital stocks: Community Health Systems (NYSE:CYH), HCA Holdings (NYSE:HCA), Tenet Healthcare (NYSE:THC), and LifePoint Hospitals (NASDAQ:LPNT). Also buys under Obama are Healthsouth Corp (NYSE:HLS) and HCP Inc (NYSE:HCP). Obamacare reduces hospital losses from covering indigent patients, says Brit.
Long Med Tech
The market is worried about all medical stocks under Obamacare. The market shouldn't be, say's Al Gore's investments in Danaher Corp (NYSE:DHR) and Henry Schein (NASDAQ:HSIC), which were his fund's two largest positions as of latest 10Q disclosure. Danaher has substantial cashflow from Environmental, Life Sciences & Diagnostics, and Industrial Technologies divisions which benefit under Obama.
Henry Schein's CEO explains on Fox that Obamacare should not be discounting his company's share price - for example, newly insured patients will create increased demand for independent practitioners, who will thus spend more on med tech.
Romney is considered less friendly towards the country. Russian companies with American investors are expected to most benefit from an Obama election, but few of these are available in American exchanges. ETFs like (NYSEARCA:RSX) could move 5% on a finalized election.
Obama is likely to spend more on early-stage scientific research. Also, I happen to think biotech is the next secular boom market. iShares Nasdaq (NASDAQ:IBB) (biotech ETF) has been doing quite well. If concerned about pharmaceuticals under Obamacare, one can pair with a short position in iShares Dow Jones (NYSEARCA:IHE) (pharmaceutical ETF).
This is not even close to an exhaustive list, however it allows for sufficient diversification to bet on the election outcome; the fundamentals of each individual company are less important in this context; with this set of investments one projects overall exposure towards the election.