Why These 5 Investments Will Benefit From the Trump Presidency
Whether you voted for Donald J. Trump for President or not, you can expect one sure thing; change. President-Elect Trump has shown throughout his campaign and during his transition planning that he will not be beholden to the status quo. Trump has eschewed established custom and protocol promising that everything from the traditional roll of the White House press corps to an unqualified support of all aspects of the Republican platform, are all up for grabs. President-Elect Trump has very specific beliefs, theories and plans related to the economy, domestic infrastructure, energy, immigration, foreign policy and defense. Why is this important to the individual investor? An analysis of his comments, speeches as well as his choices for cabinet members and advisors provide data that is crucial to investors desiring above-average returns.
Only five individuals prior to Donald Trump have been elected President of the United States while having never been elected to a previous public office. However, three of those individuals (Taylor, Grant and Eisenhower) were high-ranking military officers, and two were senior cabinet members (Taft and Hoover). So, Donald Trump is truly our first private sector, business politician. Forbes magazine estimates Donald Trump's worth at $3.7 billion earned primarily in real estate but also through such diverse industries as consumer packaged goods, entertainment, construction and media. Taking a look at Trump's business acumen coupled with his campaign pledges and cabinet and advisor nominees, we can surmise that several investment areas are well-situated for above average returns.
The five investments areas that you should consider adding to your portfolio include gas and coal, public safety, defense sector, infrastructure and construction and the overall Russia sector.
Gas and Coal Stocks
Segments of the energy sector will benefit from the Trump presidency. President-Elect Trump believes in low regulation for the sector and has publicly stated that global warming has no scientific basis. Trump's nominee for the Secretary of Energy is Rick Perry, former Governor of Texas. As Governor, Rick Perry was a known champion of the oil and gas industry and an opponent of government regulation. In 2011, Perry went so far as recommending the abolition of the Energy Department. The same department he will now run. Considering President-Elect Trump's choice of Rex Tillerson, Exxon (NYSE:XOM) CEO, as the nominee for Secretary of State, many speculate that the Trump presidency will benefit the oil sector specifically. However, the gas and coal sector is the better choice.
While the entire energy sector will benefit from fewer government regulations, a worldwide glut in oil production and reserves will continue to place negative pressure on oil related investments. However, surging U.S. natural gas production and increased natural gas exports as well as Trump's pledge to restore the prominence of the U.S. coal industry promises above average returns on even moderate growth as current valuations in both oil and coal related companies present opportunities for value investors. Trump has pledged to abolish some of the more restrictive government regulations, offer tax breaks to the industry as well as ending a moratorium on gas drilling and coal mining on federal land.
Public Safety Stocks
Trump ran for President as the law and order candidate. Early during his campaign, Trump was endorsed by Senator Jeff Sessions of Alabama whom is now Trump's choice for Attorney General. Sessions is one of the most conservative members of Congress; Trump and Sessions have made it clear during the campaign and nomination discussions that hard-line stances can be expected on immigration, drugs, guns and overall crime. While Hillary Clinton had advocated ending the use of private commercial companies for prison operations, it can be surmised that the Trump administration will continue to support both federal and state privatization of prisons. As was well reported during the campaign, a core platform of Trump's is immigration reform is the deportation of millions of undocumented immigrants and elimination of sanctuary cities. Both of these Trump administration policies will result in a dramatic growth of the commercial prison and law enforcement supply markets.
Today, corporate owned prisons house 8% of the U.S. inmate population. Even at this low rate, the prison industry is currently a $4.8 billion market in the U.S. In addition, in 2016 more than 400,000 illegal immigrants were detained and 65% of them are housed in private prisons. Under the Trump law and order administration the growth rate of this market and the related police enforcement supply market could more than double. With many of the stocks in this sector having relatively low forward looking PEs, investors have the opportunity for solid returns as the sectors overall revenue grows.
Defense Industry Stocks
Defense related spending and revenue for U.S. defense related companies have been stagnant for the past five years. While initially buoyed by increased spending due to the wars in Afghanistan and Iraq, spending by the U.S. on defense has been declining since 2011. The primary cause of the decline is congressional funding decreases. According to the Congressional Budget Office (CBO), total U.S. spend on defense has decreased from $706 billion in FY2011 to $598.5 billion in FY2015. Defense spending as a percentage of total GDP is projected to decrease to 2.7% by FY2019; the lowest since 1941. Trump has pledged to revitalize the U.S. military including increasing the size of our conventional land and naval forces and modernize the U.S. nuclear arsenal.
James Mattis is Trump's nominee for Secretary of Defense and an ardent proponent of a strong military. A retired Marine Corps General, Mattis was most recently on the Board of Directors of General Dynamics - a primary contractor to the U.S. military. Mattis is well respected by the men and women that have served with him. As stated in the Washington Post, "Trump's win is good news for the defense industry, especially when coupled with Republican majorities in the House and Senate," says Loren Thompson, a defense consultant who advises many of the nation's top-tier contractors.
Some early prognosticators are projecting more than $55 billion in increased annual defense spending under the Trump administration. As of the 3rd quarter of 2016, the sector's key valuation ratios are: PE 14.99, PS 1.19, Price to Cash 13.21 and Price to Book 4.47. As the Trump administration and Congress allocates more spend to the sector, these ratios are attractive.
Companies that should benefit from any increased spending include: Lockheed Martin (NYSE:LMT), BAE Systems (OTCPK:BAESY), Raytheon (NYSE:RTN), Northrop Grumman (NYSE:NOC), General Dynamics (NYSE:GD) and Huntington Ingalls (NYSE:HII).
Construction and Infrastructure Stocks
The American Society of Civil Engineers (ASCE) issues a report card every year giving a view of the condition of the core infrastructure in the U.S. Infrastructure includes your local water utility, the power lines to your home as well as the entire U.S. electrical grid, and every street, highway and bridge connecting our country. The ASCE assigns a letter grade based on current condition and required investments. The current grade; D+. The stated investment required to simply bring U.S. infrastructure to a level of being reasonably maintained is more than $3.6 trillion.
President-Elect Trump put forth an ambitious infrastructure improvement program during his campaign and he re-iterated the need for massive infrastructure improvement during his acceptance speech. He has said his administration will "Pursue an "America's Infrastructure First" policy that supports investments in transportation, clean water, a modern and reliable electricity grid, telecommunications, security infrastructure and other pressing domestic infrastructure needs." According to Marcia Hale, President of Building America's Future, "Investment in infrastructure serves as a powerful economic engine that creates jobs and promotes economic competitiveness..."
Modernizing the U.S. infrastructure base is one area where the Trump administration has strong bi-partisan support. Both Clinton and Trump advocated infrastructure improvement plans during the campaign. Private equity investor Wilbur Ross and Professor Peter Navarro of the University of California-Irvine analyzed both plans and commented "Donald Trump's 'America's Infrastructure First' plan will transform America's crumbling infrastructure into a golden opportunity for accelerated economic growth and rapid productivity gains."
Some companies that will be the primary beneficiary of increase infrastructure spend include: AECOM Technology Corp. (NYSE:ACM), Agco (NYSE:AGCO), The Babcock & Wilcox Co. (BWC), Catepillar (NYSE:CAT), Chicago Bridge & Iron Co. N.V. (NYSE:CBI), Emerson Electric Co. (NYSE:EMR), Fluor Corp. (NYSE:FLR), John Deere (NYSE:DE), KBR Inc. (NYSE:KBR), McDermott International Inc. (NYSE:MDR), Tetra Tech Inc. (NASDAQ:TTEK) and U.S. Steel (NYSE:X).
Obviously, we are in the midst of a debate on whether Russia or Russia sponsored entities were attempting to influence the U.S. presidential elections. Regardless of the outcome of that debate, the incoming Trump administration has made it clear that relations between the U.S and Russia must improve and will improve under President-Elect Trump. In a July 2016 interview with Bill O'Reilly, Donald Trump referencing Russian President, Vladimir Putin stated "I'm saying that I'd possibly have a good relationship. He's been very nice to me, If we can make a great deal for our country and get along with Russia that would be a tremendous thing. I would love to try it."
President-Elect Trump has now already taken steps to begin improving the U.S.-Russia relationship. The nomination of Exxon CEO, Rex Tillerson as his Secretary of State is one clear indication. In 1998, Tillerson was a director of Exxon's Russian subsidiary, Exxon Neftegas. In 2013, Tillerson received directly from Putin the Order of Friendship, one of the highest Russian awards to honor foreign citizens. Since the election, President-Elect Trump has been consistent in his statements that a better U.S.-Russia relationship is both necessary and possible. Regardless of your political affiliation, the fact is that the U.S. and Russia have extensive economic ties.
As of June 2016, Russia holds more than $90 billion in U.S. treasuries. Down from a historic high of $20.7B in 2009 as of 2015 U.S. corporations still have more than $9.2B in active Russian investments. According to the U.S. Census Bureau-International Trade Macro Analysis Branch, in 2016 the U.S. trade of goods with Russia was $4.9B in exports and more than $11.7B in imports. As a business person, President-Elect Trump will be well aware that some of the largest U.S. companies including Boeing (NYSE:BA), Pfizer (NYSE:PFE), Ford (NYSE:F), PepsiCo (NYSE:PEP), McDonald's (NYSE:MCD), Mondelez International (NASDAQ:MDLZ), General Motors (NYSE:GM), Johnson & Johnson (NYSE:JNJ), Cargill, Alcoa (NYSE:AA), and General Electric (NYSE:GE) all have active investments and business relationships with Russia.
Investors have already been heavily investing in Russia based ETFs since the election. That being said, the overall sector is still significantly below its 2011 peak and its historic trend line. Investors looking for above average returns should consider broadly investing in Russia through Exchange Traded Funds (ETF) including:
We can all agree that this has been an interesting and exciting presidential election cycle. Regardless of your political affiliation, the individual investor can expect changes coming out of Washington that will drive many sectors and, possibly, depress others. With these changes there is definitely an opportunity for the astute investor to adjust their portfolio and achieve above average returns.
Disclosure: I am/we are long FLR DE EMR GD NOC RTN.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: For full disclosure, the writer has long positions in ETFs that include FLR, DE, EMR, GD, NOC and RTN.
Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.