The Fiscal Cliff and Investment Opportunities

by Hilary Kramer | October 1, 2012 10:35 am

The Fiscal Cliff and Investment Opportunities

The impending “fiscal cliff” is in a bit of limbo right now as Congress and the nation turn their attention to the upcoming election. Some behind-the-scenes talks and ideas are reportedly taking place, and they have to result in something. The government’s own Congressional Budget Office has warned of the economic consequences of the going over the fiscal cliff, and new research from Citigroup (NYSE:C[1]) is also causing a commotion on Wall Street.

Citi expects a severe 20% sell-off in the market that could have the S&P 500 tumbling as much as 300 points in early January and the Dow sliding more than 2,000 points. But the fiscal cliff could impact more than just stocks; the research suggests that oil prices could drop by $20 a barrel, unemployment would surge to at least 9.5% through 2014, we could see a 5% appreciation in the dollar, and GDP could shrink to -1%.

Another number that we don’t want to ignore is $450 billion. That’s the approximate hit to the U.S. budget when taxes that were rolled back by President Bush come back into effect in 2013. It’s a pretty scary number, one which I discussed on CNBC’s Kudlow Report last week.

The message is clear that if lawmakers are not able to find common ground in the debate over taxes and spending cuts, the damage to the market and the economy could be severe.

Now, for those of you who know me and my investment strategy, you know that I’m bullish on stocks and optimistic that the U.S. is on track for a slow but eventually full economic recovery. And while I’m confident in the resiliency of American companies and hopeful that Washington’s decision-makers will patch together an agreement before year-end, there’s no sugar-coating the fact that conditions in the U.S. could worsen if lawmakers sit on their hands this fall.

But even if the solution isn’t in place by December 31, I do expect something to get done early in the New Year, which could set the stage for a pretty good 2013 as the global economy regains some momentum and Europe’s debt crisis gets closer to resolution.

As you know, my focus here in Kramer Capital Research is on the longer-term potential, which remains good. Yet, I’m still mindful of the crosscurrents, so I’m focusing on companies that are growing even amid all of the uncertainties.

So, now, I’d like to tell you about three such companies. All have great growth potential and opportunities despite, and even because of, the uncertain economic climate. Let’s take a look:

Vascular Solutions

Vascular Solutions (NASDAQ:VASC[2]) is a little-known medical device company that is leading the fight against the #1 killer in America — heart disease. Even a global economic slowdown won’t stop people from getting — and treating — heart disease. VASC has a strong history of developing products that meet unmet needs (such as next-generation catheters), and stands to benefit from the growth of the entire industry.

Vascular Solutions is a quality, growing company that has been a real innovator in its field. Its new products should help keep results strong, with annual earnings growth expected to be in the 15% range. There is also a chance VASC could get acquired with all the M&A going on in health and biotech stocks right now. Its strong cash flow, solid balance sheet and high gross margins would all be very attractive to a potential suitor.

AutoNation

AutoNation (NYSE:AN[3]) is the largest U.S. retailer of new vehicles, with 315 dealerships across the country and 32 different manufacturer brands under its belt. AutoNation sells used cars, but it derives more than half of its revenue from the sale of new cars. And unlike industry competitors like General Motors (NYSE:GM[4]), AutoNation’s share price has steadily increased from its 2009 low of $4, to the $40 range where it trades today, climbing11% this year alone.

But it is AutoNation’s position in the market that has me watching this stock as it closes out the year. AN reported second-quarter earnings that beat analysts’ expectations, and shares soared to their highest levels since September 2009. Sales were up 17%, to $3.9 billion, and profits from continuing operations beat 13 analysts’ expectations of 59 cents, coming in at 66 cents per share.

Jack Henry & Associates

Jack Henry (NASDAQ:JKHY[5]) is a dominant player in processing transactions and managing information for financial institutions and corporations. Today, the company serves almost 11,000 clients and generates almost $1 billion in sales.

JKHY has a strong market position, and solid financials. In the most recent quarter, revenues were up 9%, operating income was up 18% and earnings increased by 20% to 42 cents a share from 35 cents the previous year.

Electronic payments are the future of money, and we are well on our way to being a cashless society. Debit cards now rule the day — outpacing credit card use for the first time ever. But now Jack Henry & Associates is bursting onto the scene with a new payment method that could make both debit AND credit cards obsolete. This is just one of the reasons I’m excited about JKHY, and the stock is already proving to be a winner for my GameChangers readers.

Despite the uncertainty, now is still a great time to take advantage of select opportunities in the market as we close out the year. While I am keeping a close eye on the political and economic developments that could move stocks in the last quarter of the year, there are still plenty of worthwhile investments to take advantage of, and my strategy puts us in the right place to make the most of all the market has to offer.

Endnotes:
  1. C: http://studio-5.financialcontent.com/investplace/quote?Symbol=C
  2. VASC: http://studio-5.financialcontent.com/investplace/quote?Symbol=VASC
  3. AN: http://studio-5.financialcontent.com/investplace/quote?Symbol=AN
  4. GM: http://studio-5.financialcontent.com/investplace/quote?Symbol=GM
  5. JKHY: http://studio-5.financialcontent.com/investplace/quote?Symbol=JKHY

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