Uncertainty surrounds America’s new President, Donald Trump, and nowhere is that more true than in the financial markets. The policy decisions of Trump — combined with a Republican majority in the House and Senate — can and will have major impacts on a number of stocks.
The problem? Many investors still aren’t sure what Trump’s policy objectives actually are.
Trump himself isn’t always crystal-clear in his goals — see, for instance, his often contradictory statements on financial regulation, or drug prices. U.S. stocks rallied after the election on hopes of corporate tax reform and infrastructure spending; but it’s no longer clear that either is a top priority for the administration at the moment.
All told, investors in most stocks are looking for more direction, and more clarity from Washington, D.C. But for these 12 stocks, how President Trump chooses to move forward will have a major impact beyond corporate tax rates and economic growth.
Stocks That Will Live and Die by Trump: Walmart (WMT)
There’s a long list of retailers that could be impacted by President Trump’s proposed border adjustment tax. As the nation’s largest retailer, Wal-Mart Stores, Inc. (NYSE:WMT) is likely at the top of the list.
Walmart has even teamed up with rival Target Corporation (NYSE:TGT) and more than 100 other retailers to fight the tax, through an organization named Americans for Affordable Products.
For Walmart, a border tax could be very painful. The company’s “always low prices” ethos means that its margins are quite low: just 5% in 2015, for instance. While the company claims that two-thirds of its sales come from U.S. suppliers, most of that is food and groceries. Estimates suggest that as much as 80% of WMT merchandise comes from China; Mexico is another major market.
With the AAP organization citing a potential 20% increase in prices of imported goods, Walmart could be stuck between a rock and a hard place. Its margins are such that it would have no choice but to raise prices — and possibly to a greater extent than rivals with better domestic suppliers. But raising prices would undercut the company’s clear competitive advantage, and its core mission, of providing customers with the best prices.
WMT stock has declined rather steadily of late, along with the retail space as a whole. The possibility of a border tax seems a clear reason why.
Stocks That Will Live and Die by Trump: Las Vegas Sands (LVS) and Wynn Resorts (WYNN)
For casino operators with operations in the Chinese enclave of Macau, the past few years have been a roller coaster.
Las Vegas Sands Corp. (NYSE:LVS) stock dropped below $2 during the financial crisis. It was worth 50 times that much by early 2014, as Chinese customers gambled billions of dollars every month in its casinos. The Macau market then tanked, due in large part to corruption investigations by the Chinese central government. So did LVS stock, which fell by more than half over the next two years.
But gambling revenue finally stabilized and then returned to growth late last year, boosting shares of Las Vegas Sands and peers like Wynn Resorts, Limited (NASDAQ:WYNN) and MGM Resorts International (NYSE:MGM). There’s a sense that Macau is “back to normal.” Meanwhile, both the government and casino owners are working to provide more non-gambling options, and a more diversified revenue base.
As impressive as Macau’s gambling revenue is — it is six times that of the Las Vegas Strip — there are significant risks in operating in Macau. China still is controlled by a single-party Communist government. Regulatory moves already have limited the profits of U.S. operators. WYNN CEO Steve Wynn famously ranted about table cap rules in 2015, only to be reprimanded by the Macanese government.
Steve Wynn now is a close confidante of Trump — and he would be wise to tell Trump to negotiate carefully and respectfully with the Chinese. Licenses for both Wynn and LVS expire in 2020. While it’s unlikely, China could see the billions of dollars in value in those licenses as a useful weapon should a “trade war” escalate with the U.S.
Given how important Macau is to both LVS and Wynn (MGM’s profits are far more US-driven), that small risk would be a big problem should it come to pass.
Stocks That Will Live and Die by Trump: Enova International (ENVA)
Enova International Inc (NYSE:ENVA) was spun off from pawn shop operator Cash America International in late 2014, in large part due to the regulatory risk facing the business.
Enova offers short-term loans over the Internet, and the so-called “payday lending” business came under federal scrutiny. The Consumer Financial Protection Bureau, created under former President Barack Obama, has proposed strict rules limiting short-term lending. Similar rules in the United Kingdom decimated Enova’s profits in that market; investors clearly feared a repeat in the U.S. ENVA stock started trading around $30; in little over a year, shares were near $6.
The news has been a lot better of late.
ENVA shares gained 30% in the days after Trump’s surprise win, boosted by hopes of lower regulation in the space. Both Trump and the GOP as a whole have expressed dislike for the CFPB and its director, Richard Cordray, who led the investigation into the for-profit industry. There’s little doubt that a law ending the CFPB — or even diminishing its power — would remove a key risk for Enova.
State regulators still have plenty of power to control marketing, interest rates and other factors. But those rules generally are far more lenient than those proposed by the CFPB — and far more beneficial for Enova stock.
Stocks That Will Live and Die by Trump: Sprint (S) and T-Mobile (TMUS)
Two big beneficiaries of the Trump election might soon be combined into one. A tie-up between Sprint Corp (NYSE:S) and T-Mobile US Inc (NASDAQ:TMUS) long has made a lot of sense. A combined Sprint/T-Mobile could better compete with the industry’s two biggest players, Verizon Communications Inc. (NYSE:VZ) and AT&T Inc. (NYSE:T).
The problem is that the FCC under Obama seemed unlikely to bless any such merger on antitrust grounds. A Republican-led agency, however, might feel differently. And so a merger that seemed logical, but impossible, now seems logical, and likely.
Shares of both Sprint and T-Mobile have gained nicely since the election, even with S stock weakening of late. And the combination of Sprint’s spectrum with T-Mobile’s subscriber base, plus likely billions of dollars in cost savings, provides possible upside if the merger can go through.
That said, whether Donald Trump would favor such a merger isn’t clear. The president has criticized large-scale mergers in the past, even if Republican orthodoxy suggests a lighter touch. If Sprint and T-Mobile can get a sense that a deal would be allowed by regulators, a merger likely would occur in the near future. And that likely would drive up both S stock and TMUS stock.
Stocks That Will Live and Die by Trump: On Assignment (ASGN)
Temporary staffing agency On Assignment, Inc. (NYSE:ASGN) could be a hidden beneficiary of Trump policy.
Both Donald Trump and Attorney General Jeff Sessions have criticized the H-1B Visa program. That program provides visas for skilled workers, many in high-tech fields such as engineering and computer science. Meanwhile, the president’s consistent and aggressive criticism of outsourcing may lead U.S. tech firms to keep more jobs in-country.
On Assignment would benefit on both counts.
The company’s base of skilled contract workers, including its CyberCoders business, would benefit from any reduction or elimination of the H-1B program. That outcome would imply both more positions to be filled on a contract basis — and more pricing power for On Assignment in dealing with large corporations. The same is true for lower outsourcing.
If Trump intends to focus on domestic jobs, as seems to be the case, On Assignment stock should rise nicely.
Stocks That Will Live and Die by Trump: JPMorgan Chase (JPM)
It’s in the area of financial regulation where Trump’s plans seem the most difficult to decipher.
An executive order this week appeared intended at the Dodd-Frank Act, enacted in response to the financial crisis. But the order didn’t mention it by name — and the act needs to be repealed by Congress, with a 60-vote majority in the Senate. That seems unlikely.
Meanwhile, Trump has said that he doesn’t want to break up major banks — but the Republican platform included a mention of restoring the Glass-Steagall Act, which separated consumer and investment banking.
It was the repeal of that Act that led to the creation of JPMorgan Chase & Co. (NYSE:JPM), along with other powerhouses like Citigroup Inc (NYSE:C). And it’s those global banks now waiting to find out what regulatory reform might look like — if it comes at all.
The worldwide nature of modern banking might limit the impact of a Dodd-Frank repeal. JPMorgan Chase’s international businesses will be unaffected, for instance. But the end of the “Volcker rule” — a key part of the Dodd-Frank law — could allow JPMorgan Chase and other banks to once again trade in-house.
Bank stocks have surged since the election, in part due to hopes of lighter regulation (and less fines) and in part due to expectations of higher interest rates. JPM has been part of the rally, with shares up about 25% since Election Day. It seems likely that trading in the near term will be impacted by what comes out of D.C. — even if, at the moment, no one is exactly sure what that will be.
Stocks That Will Live and Die by Trump: Blucora (BCOR)
A series of acquisitions and divestitures over the past few years turned former search engine provider InfoSpace into Blucora Inc (NASDAQ:BCOR).
Blucora owns two businesses: online tax provider TaxAct and broker-dealer HD Vest. Both companies had a vested interest in the November elections.
For TaxAct, Trump’s win likely offered a sigh of relief. On the campaign trail, Hillary Clinton had on occasion touted a proposal that would preclude lower-income Americans from filing a tax return. Essentially, the IRS would prepare taxes for millions of Americans — cutting TaxAct out completely. As the low-cost provider in the space, TaxAct, and Blucora, would have lost substantial revenue and profits from such a decision.
For HD Vest, the so-called “fiduciary rule” to be implemented by the Department of Labor created a significant headwind. The new rule created a larger obligation for its investment advisers — along with more paperwork, and more cost. The secondary impacts for the industry, and HD Vest, were significant as well. Bank of America Corp’s (NYSE:BAC) Merrill Lynch stopped offering commission-based IRA accounts, for instance, moving to a more regulatory-friendly fee-based structure.
Blucora hasn’t given much color on its plans yet, but it did cite an estimated $1.8 million annually in increased compliance costs. But the new fiduciary rule now is in limbo, with President Trump ordering a review, but lacking the power to strike down the rule himself.
It’s not clear how it will play out; and meanwhile, HD Vest and Blucora already have done much of the legwork required to comply. It may be a case of “too little, too late” in terms of repealing the rule. But even if it is repealed, the damage to HD Vest may already have been done.
Stocks That Will Live and Die by Trump: Lockheed Martin (LMT)
Lockheed Martin Corporation (NYSE:LMT) already has seen the potential impact of Donald Trump’s words. A single tweet from Trump in December sent shares down 2%. The President criticized cost overruns from LMT’s F-35, and said he had asked rival Boeing Co (NYSE:BA) to “price-out” a comparable F-18.
Lockheed Martin wound up reducing the price by about 8% — a total of roughly three-quarters of a billion dollars. And it seems to leave LMT in a dangerous place.
A negotiator like Trump generally doesn’t stop at just one concession.
The F-35 aside, there’s a question of how President Trump and the GOP plan to treat defense spending. Generally, Republicans boost military expenditures, which benefits BA and LMT. But with plans for infrastructure investments, and a traditional focus on budgets, something has to give.
LMT shareholders should hope that “something” is somewhere else in the budget.
Stocks That Will Live and Die by Trump: Caterpillar (CAT)
Caterpillar Inc. (NYSE:CAT) stock already has benefited from Trump-related optimism. CAT stock has increased over 10% since the election, even after a steady decline over the past week. Those gains actually have left CAT looking a bit overvalued, with the stock trading at more than 30 times 2017 EPS estimates.
But the bull case for the stock, which has rebounded sharply from lows below $60 a year ago, has been based on eventual improvements in mining and oil and gas. Of late, those hopes have been paired with the plans detailed by Trump to invest billions in U.S. infrastructure.
Caterpillar would be a direct beneficiary of those investments, and billions of dollars in cost cuts mean earnings could rebound sharply from current depressed levels — and make CAT stock look cheap.
Personally, I’m skeptical, and in fact I have a bearish option position in CAT. But if the GOP and Trump can put together an infrastructure plan, it should help Caterpillar in the long run. And the announcement itself — if it comes — might boost the stock in the near-term.
Stocks That Will Live and Die by Trump: Arch Coal (ARCH)
Arch Coal, Inc. Class A (NYSE:ARCH) emerged from bankruptcy in October, and got an immediate gift from Trump’s surprise win a month later. The stock rose 25% in just three sessions, as investors bet Donald Trump would keep his promises to revive the coal industry.
That optimism already is fading, as ARCH stock has given back nearly all of the post-election gains. That’s despite Senate passage of a bill last week that would remove the so-called Stream Protection Rule. That rule has been pushed by environmentalists, but criticized by the industry, which argues it limits needed exploration.
The problem may be that coal’s problems go beyond regulation.
Natural gas prices remain low, and utilities are moving away from coal-powered plants in response. The state of Oregon is phasing coal out altogether by 2035, and other states may follow.
Trump’s comments in favor of increased coal mining have at least been consistent, and in theory his election should be good for Arch Coal and other coal stocks. But in practice, the benefits may be harder to get.
The author is short CAT, and has no positions in any other securities mentioned.
