Real World Politics Meets Real World Investing

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David Evanson and Hardeep Walia, Fall, 2012

This is the time of year when you start to see investment ideas based on predictions of the US Presidential Election. There are lists of stocks that should or could go up under a Republican administration and a companion list of companies that are predicted to rise under a Democratic administration.

Personally, I don’t think selecting specific stocks tied to the outcome of an election is a very good idea. While investors could select the right stock for the right reasons, there’s too much company specific risk in any given stock: loss of a key supplier, scandal, management changes, unfavorable currency fluctuations. And many election issues are not simply resolved by who ends up occupying the White House—far more complex analysis is required.

The free market, in theory, can do some of this homework for you. These same election issues are already being voted on daily, ahead of November 6, in Benjamin Graham’s “voting machine” across many companies. Motif Investing recently published 21 thematic indexes—called motifs—to “poll the votes” ahead of the election: everything from Obamacare to Cleantech. This policy-tracking isn’t completely scientific, not yet at least, but politically-oriented motifs offer a window into how each Party’s policy positions are playing out in real economic terms, which for self direct investors, could prove to be a useful tool.

The top performing Republican issue motif index for the last month was Guns, Guards and Gates, up 2.5% for the month and 15.9% for the year. This index includes companies such as Smith & Wesson (SWHC), Tyco International (TYC), Alliant Techsystems Inc. (ATK) and other security companies. Although the President has not done much to affect relevant laws, guns is always a safe get-out-the-vote issue for the Republican base.

Likewise, the top performing Democrat issue motif index for the last month was Senior Care that includes companies such Medtronic Inc. (MDT), Fresenius Medical Care AG & Co. (FMS), and DaVita Inc. (DVA). It is up 2.9% this month and 27.7% for the year. With Obamacare front and central in this election, this index tracks the companies that benefit from a growing insured ranks and an aging America.

In addition to the specific issues, this is an election about big money donors. President Obama and Governor Romney could end up spending over $1B each on this election. Just as some polls show President Obama with a slight edge, the Democratic Donors motif index is ahead of the Republican Donors motif index. Specifically, Democratic Donors that includes stocks like Time Warner (TWC), Google (GOOG) and Microsoft (MSFT), is up 2.6% for the month, up nearly 33.5% in the past year. While the companies in Republican Donors which includes Goldman Sachs (GS), Exxon Mobil (XOM) and Sheldon Adelson’s Las Vegas Sands (LVS) —increased 1.3% over the past month and 25.3% over the past year.

Unfortunately, no matter who wins the election, many Americans believe that the country is going to remain polarized into haves and have nots, with neither the Republican or Democratic agenda dictating the business climate. For that the Income Inequality motif index tracks stocks that caters to the 1% and the 99%. This index consists of luxury retailers like Saks (SKS), Tiffany (TIF) and Ralph Lauren (RL) as well as deep discount retailers like Big Lots (BIG) and Dollar General (DG). It is down 0.1% for the month, but up 20.3% for the year.

Tonight many of these issues will be on display in the vice presidential debate between Paul Ryan and Joe Biden. There will be lots of chatter and noise the next day from pundits, with the somewhat ironic result that real clarity may be hard to come by. I will instead be watching how investors vote with their buys and sells. Especially until the real votes come in on November 6.

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