by James Brumley | October 16, 2013 1:48 pm
While the government shutdown has been tough for most of the market, a handful of stocks in certain industries have been hit particularly hard by the budget impasse in Washington D.C.
There is good news, though — once the political posturing is done, the budget is approved, and the debt-limit raised, the hardest-hit names should rally back equally well. Budget approval is how this will all end sooner or later, so a recovery is simply a matter of time.
These five small-cap stocks are particularly well-positioned to snap back from their recent slump.
How does the government’s shutdown affect maritime shipping demand? It doesn’t … at least not directly.
However, there’s an indirect consequence on the shipping industry when certain government offices are shuttered. The closure of the National Agriculture Statistic Service, for instance, has meant farmers and commodity buyers don’t have access to their usual demand, supply, and price reports. In turn, since these growers don’t know what their goods are worth, they’re not selling many, if at all. Ditto on the buying end.
But what does that have to do with maritime shipping, and dry-bulk shipping in general? If the food commodity market has ground to a halt, then the need to ship dry-bulk goods has also been crimped. Once the key agricultural offices reopen and price information starts flowing again, demand for transportation services will ramp up.
First in line for that rebound is small cap shipper DryShips (DRYS), which has seen its shares slide 13% since their late-September peak.
As if the for-profit education sector needed any more headaches — after a wave of accreditation scrutiny earlier in the year — the shutdown may have thrown them out of the frying pan and into the fire.
See, with the shutdown now lasting more than a week, the number of people processing federal aid has been reduced due to furloughs, which in turn means there’s a backlog of aid applications. It won’t affect students who are already enrolled in the fall semester; they’ve all received their aid already. Not every for-profit school follows the traditional two-semester calendar though, and a few of them cater to a student base that relies heavily on this now-backlogged aid.
American Public Education (APEI) has been one of the biggest victims of the DOE’s partial shutdown. The 41,000 individual online classes scheduled to begin a few days ago were reduced by 13,000 when many military and government employees lost their tuition assistance as of October 1st.
APEI has been under plenty of selling pressure of late, but the mere whiff of a budget deal has already prodded the stock upward again. Given time for the effects of an approved budget to kick in, the stock should continue to climb as more students flock back to school, spurred by freely flowing financial aid.
Just for the sake of clarity, though the budget-related shutdown isn’t helping dairy farms, it’s not the lone reason dairy companies have been struggling of late. Mostly they’re the victims of a soon-to-expire (on December 31st) dairy-price stabilization bill.
The primary worry is that Congress will greatly alter the usual terms of the bill in order to come to some sort of budget consensus, leaving the dairy business unable to support itself. The lesser worry is that the shutdown will last through the December 31st deadline, preventing the introduction of any kind of new farm bill in the meantime, which means law from 1949 will be re-instituted by default. Either way, the price of milk for consumers would theoretically skyrocket and end up pricing dairy products right out of the market for these small-cap stocks.
Once the budget impasse is wrapped up though, a new Dairy Stabilization Act should be right around the corner. That’s good news for a small-cap company like dairy farm Lifeway Foods (LWAY), which saw its shares fall nearly 25% over the course of August and September when the budget impasse was shaping up.
It sounds a little too obvious to be true, but apparently, furloughed employees really do stop eating out when they’re not receiving a paycheck, even though they can remain relatively confident they’ll be back to work sooner than later. History says about three weeks’ worth of shutdown starts to take a measurable toll on the nation’s personal consumption.
Larger restaurant chains can handle the lull. A less liquid small-cap name like Carrols Restaurant Group (TAST), however, feels the pain pretty intensely. That’s why shares are down about 8% this month.
Once those 800,000 furloughed employees start getting a paycheck again though, Carrols shares should work their way right back up to where they came from.
While most of the federal government’s mortgage loan-guarantee programs (like the FHA) are still operating, many of them are operating on thinner staff, meaning it’s taking longer to complete the lending process. And, for certain loan types and agencies that require annual funding (like FHA’s multifamily housing office or the USDA), they’re not backing any mortgage loans until further notice … which is to say, until the government’s bank account is refilled.
The reduction in the number of loan approvals as well as a reduction in the length of time to get a loan approved certainly hasn’t helped homebuilders like The Ryland Group (RYL); RYL shares are down almost 5% in October.
But the bigger threat to Ryland is the sheer uncertainty of buying a home in a foggy real estate environment. Once the shutdown ends and the lending gears get oiled again, however, Ryland and other small cap stocks in the industry should perk right back up.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
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