by James Brumley | September 30, 2013 2:45 pm
With the likelihood of a government shutdown looming large, it’s a good idea to start looking for stocks that could survive the political grandstanding. Three names stand out as the best bets to survive the noise, largely because any governmental spending freeze isn’t apt to impact their bread-and-butter business in the least … for a couple of different reasons.
OK, it’s conceivable that sales of Coke or Pepsi could be slightly crimped if the snack shops in government-funded museums like the Smithsonian or our national parks couldn’t open their doors. But that’s a drop in the bucket for Coca-Cola (KO) and PepsiCo (PEP). The furloughing of thousands of government workers (like the folks working at the aforementioned state parks and museums) will mean a slight dip in consumer spending, but even most of them know any shutdown is going to be very temporary, which means they’ll continue plunking down a couple of greenbacks for beverages and chips.
Not that it would matter much even if they did keep their purse strings drawn tight. Both Coke and Pepsi derive at least half their revenue overseas, where there are no debt-ceiling debates or Obamacare wrangling to bring their government’s non-essential operations to a screeching halt. Between the two, Coke may be the better choice than Pepsi, in that about two-thirds of Coca-Cola’s sales are generated by foreign sources, versus only abut half for PepsiCo.
Along the same lines as the importance of Coke’s and Pepsi’s overseas business, investors may want to go straight to the source of that foreign strength and buy foreign stocks. No need to pick one or two American depositary receipts; the best foreign company investments may not come in an ADR form anyway. The easiest way to play may just be an exchange-traded fund like the iShares MSCI EAFE Index Fund (EFA), or perhaps better still, the Vanguard FTSE All-World ex-US ETF (VEU), which generally costs less to manage than the larger iShares fund. Either way, neither of the funds has exposure to U.S. equities, and shouldn’t see much — if any — of a shutdown-related stumble.
Last but not least, you can add healthcare companies to the list of organizations that aren’t actually affected by a government shutdown. The pharmaceutical industry is particularly well-shielded from the effects of Uncle Sam’s frozen pocketbook.
Some investors may worry that between the sequester earlier in the year and the government shutdown now, that the already-tepid budget for public funding of drug development and research will run dry. That idea is overblown, however, and a little irrelevant. Insurance companies and individuals still shoulder the vast majority of spending on medicine and basic healthcare, and that’s not apt to change just because the federal government goes into hibernation mode. Medicare is still going to be funded and operational, and the industry never relied on government spending for non-Medicare patients in the first place.
Be that as it may, an investor may still want to keep any pharmaceutical play as simple as possible, opting for a company that makes something individuals will remain willing to pay for without a second thought. That’s going to be a name like Johnson & Johnson (JNJ), which manufactures the basics like Tylenol, Sudafed and Neosporin along with non-optional therapies like insulin and vaccines. It may not be sexy, but those consumable goods will never go out of style either.
With all of that being said, investors should know that while the above stocks and ETFs are apt to be minimally impacted by a shutdown of the federal government’s non-essential programs, the odds of such a spending freeze are already minimal. The odds of a long, drawn-out shutdown are even lower. We’ve not seen a freeze in the past 17 years, and it would be political suicide for many of our leaders in Washington to actually let it happen now.
But, if for some reason this political stalemate does persist well into October, that’s when the upside of healthcare and consumer staples stocks along with foreign equities will begin to become clear. If you’re not thinking a shutdown is going to last long, history says these spending freezes don’t impact the market to any significant degree (though they make for some scintillating headlines), and may not even be worth worrying about.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
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