It’s impossible to fully separate investing from politics. Just in the last few quarters, we’ve seen interest rates, tariff impacts and tax reform all move broad markets. For individual companies, political moves can have big and small impacts, whether it’s tax rate changes, regulatory enforcement or policy changes that impact growth prospects.
Some companies intrinsically have more political exposure than others. Defense contractors like Lockheed Martin (NYSE:LMT) and Raytheon (NYSE:RTN) depend heavily on federal government budgets. Marijuana stocks will move greatly over the next few years depending on the pace of legalization worldwide.
These 15 companies, however, are not generally among those with the highest political risk (or reward). Nevertheless, they will be watching political trends particularly close in 2019. With split government returning to the U.S., upheaval in Europe and tariff-driven worries in Asia, there’s no shortage of potential political news on the horizon. That news could hurt — or help — these stocks in 2019, and beyond.
Facebook, Alphabet and Twitter
To be sure, political sentiment already has moved shares of social media stocks Facebook (NASDAQ:FB), Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) and Twitter (NYSE:TWTR). Executives from all three firms have testified in front of Congress this year. President Donald Trump has used Twitter in an unprecedented manner.
But so far, other than some trading movements around various hearings, political factors don’t really seem to have moved the group all that much. In fact, all three stocks generally have gone in different directions. GOOGL stock has tracked the broad market. Facebook stock has fallen due to higher spend and self-inflicted wounds. TWTR, even with a pullback of late, has been one of the better large-cap stocks in the market in 2018.
The key question still looms: will regulators in the U.S., and elsewhere in the world, start looking closer at these companies? Alphabet has faced antitrust penalties in Europe, but has been largely left alone stateside. Will that status quo remain? Can the company make a comeback in China after largely ceding that market to Alibaba (NYSE:BABA)?
For Facebook and Twitter, in the U.S. both sides seem upset. Liberals worry about privacy and hate speech. Conservatives see the platforms as politically biased. It’s possible that a motivated Congress could enact tighter regulation, which might limit the ability of both companies to monetize valuable user data. And activists already have called for a ‘breakup’ of Facebook.
The political situation surrounding social media and big tech certainly isn’t going to resolve itself in 2019. But it very well could have an impact on stock prices next year. A nervous market already has sold off all three stocks to varying degrees in the last couple of months. More negative headlines in 2019 will accelerate that pressure.
Few large-cap companies have been more hit by politics of late than Caterpillar (NYSE:CAT). Most notably, trade war concerns have notably colored the perception of the stock, after a cost-cutting-driven turnaround had led CAT stock to nearly triple between late 2015 and early 2018.
To be sure, trade war and tariff fears have impacted companies across the market (and likely the broad market as a whole). But for Caterpillar, the concerns impact seemingly every aspect of its business. The Asia/Pacific region accounted for over 20% of revenue in 2017, with China the primary driver of 39% growth in regional Construction Industries revenue, per the 10-K. Lost sales in that market would hurt the company’s ability to grow the top line going forward. And it was China’s aggressive stimulus in the beginning of the decade that led the so-called “supercycle” that sent Caterpillar earnings soaring.
Higher input costs, driven by tariffs, could pressure margins. Those costs also could lead to more mining activity and offset some of that pressure. Looser U.S. drilling regulation and the revival of the “shale boom” have helped sales of reciprocating engines. But now, lower oil prices could lead that demand to recede.
Caterpillar always has some political exposure. But with trade issues – between the U.S. and China, in “Brexit“, and elsewhere- such a focus worldwide, politics will have an even larger effect on CAT stock in 2019. And that seems likely to lead to some bumpy trading – and perhaps at some points a buying opportunity for investors who believe the company can fight through the noise.
15 Political Stocks: Deutsche Bank (DB)
Deutsche Bank (NYSE:DB) has been a mess for some time now. While U.S. financials have rallied in the past few years — a weak 2018 notwithstanding — DB stock has done almost nothing but go down. The stock touched an all-time low this month before a recent, modest rally.
The rally came in large part due to reports that the German government was looking to give Deutsche Bank some help. Most notably, Germany seems to set to make it easier for DB to merge with Commerzbank AG (OTCMKTS:CRZBY).
Whether the combination will work is up for debate. There’s certainly an argument that putting two struggling banks together is unlikely to result in one stronger entity. But Germany’s interest in shoring up Deutsche Bank suggests that the bank has friends in high places, and a Commerzbank tie-up could drive cost savings and reposition the banks to again compete on the global market.
This remains a high-risk story, but backing from the central government could remove at least some of that risk. And with DB trading at just 0.24x book value, dip-buyers will be watching the German government’s actions closely.
Stamps.com (NASDAQ:STMP) has been a battleground stock for several years now. Short sellers have argued that Stamps.com revenue and margins are unsustainable, built off the back of agreements with the United States Postal Service that eventually will be renegotiated. Bulls, in turn, point to impressive growth and a long-term tailwind from the expanding share of sales executed online.
The bears have won of late, with STMP down 46% from its 52-week high. But the stock still has better than tripled since the beginning of 2015. The political battle, however, has yet to really play out.
Reports this summer that the USPS was considering extensive changes sent STMP tumbling 10% in a single session. A final report this month that seemed to suggest much more muted alterations sent the stock flying in the opposite direction.
With President Trump occasionally voicing his displeasure with the money-losing ways at the USPS, however, more changes could be on the way. At the very least, STMP shareholders do face the risk that a single Presidential Tweet could move the stock on any given trading session.
Of course, it isn’t Stamps.com on which Trump is focused when he complains about the Postal Service. Rather, it’s the supposed “last mile” subsidy the agency’s pricing gives to e-commerce behemoth Amazon (NASDAQ:AMZN).
A series of Tweets from Trump back in April sent AMZN stock down over 10% in just a few trading sessions. And there’s much than just a short-term risk here. Amazon’s operating margins remain thin (as is the case for most retailers), at just 5% so far this year. Shipping costs, per the 10-Q, are over 10% of revenue. A notable increase in USPS rates could elevate that spend and hit Amazon’s margins enough to dent profitability.
Of course, that’s far from the only political risk Amazon faces. Minimum wage hikes could move labor costs higher, though Amazon already has raised pay. Calls for antitrust action, which admittedly would require a major change in the goals of antitrust law, are growing louder. Its HQ2 process likely cost it goodwill with state and local authorities.
Like most of “big tech”, Amazon is going to be a lightning rod for controversy for some time to come. And as seen in April, those controversies can have a big effect on the AMZN stock price.
Of late, that turmoil has escalated, and it has had a severe impact. Earnings started turning south this summer and now same-store sales are falling. Unrest in Nicaragua has hit revenue in that important market and raised fears that it will spread through PriceSmart’s supply chain while also affecting neighboring Costa Rica.
The strong dollar — driven in part by political considerations — has not only hurt PriceSmart’s reported earnings, but affected its business model in countries like Colombia. Weaker local currencies have led the company to source locally instead of from the U.S. — undercutting its competitive advantage against in-country rivals.
PSMT stock now is at a six-year low as a result. Its CEO is departing at the end of the year. There’s an interesting potential turnaround story here, as the company moves more strongly toward e-commerce and looks to accelerate its expansion in the region. But that plan simply can’t work without some help on the ground from the turbulent economies in which the company operates.
15 Political Stocks: General Motors (GM)
There are two key risks when it comes to the restructuring plans at General Motors (NYSE:GM). First, will they work? And secondly, will GM be allowed to execute its plan in full?
As for the first question, there are reasons for optimism. Cost-cutting should make GM a leaner, more flexible business, as Chris Lau argued. There’s still concern as to whether GM can compete in self-driving and electric vehicles, admittedly. But GM’s aim of focusing on more profitable, larger vehicles while managing costs seems like the right move for shareholders.
But that cost-cutting also has raised the ire of many lawmakers. President Trump has said publicly that GM had “better” replace plants being closed in Ohio and Michigan. Local representatives on both sides of the aisle are upset. And with Democrats taking back the House in 2019, there’s the potential for increased fuel-economy standards if a Democrat takes the White House in 2021, before GM’s transformation will be complete.
We know where GM wants to go. We don’t know whether it will be able to get there.
GM’s pain may be Tesla’s (NASDAQ:TSLA) gain. CEO Elon Musk already has said he would be interested in acquiring closed GM factories, after it acquired its current Fremont plant for just $42 million back in 2010.
And the condemnation of the GM move could allow Tesla to cast itself in a better light, and maybe get some cash for its troubles. With a President who focuses on job growth above all else, and a Democratic House of Representatives that’s pro-environment, could a deal be made? Perhaps a reinstatement of the expiring federal tax credit for EVs in return for Tesla guaranteeing jobs in key swing states Ohio and Michigan?
That tax credit expiration should help demand in Q4 and raise concerns about Q1 sales. But as Ford (NYSE:F) and GM retrench, Tesla could find a way to fill the gap and make itself a political favorite.
Small-cap eHealth (NASDAQ:EHTH) already has seen substantial political-induced volatility. EHTH stock went from $15 at the beginning of 2013 to $60+ less than a year later on optimism that it would profit from the exchanges created by the Affordable Care Act (colloquially known as “Obamacare”). By the end of 2014, however, EHTH was at $10, as a buggy rollout and weaker-than-expected demand hit earnings and optimism toward the stock.
EHTH has climbed nicely since then, however: the stock has more than doubled in 2018. It will need political help to stay at these levels. A federal judge has struck down the ACA, bringing uncertainty to the market. Democratic wins in the House likely suggest the status quo will be roughly maintained, but disorder runs the risk of impacting eHealth’s individual and family plans business.
That business admittedly is shrinking, though still profitable. But even the growing Medicare business needs government help. And if there are any notable changes in expectations, perhaps increasing belief that a Democrat will win in 2020, that uncertainty could lead EHTH on yet another roller-coaster ride.
Wynn Resorts (WYNN) and Las Vegas Sands (LVS)
Fears of a China slowdown and its impact on the companies’ operations in Macau (and in the case of LVS, Singapore) are a key worry. But there’s a large political risk here as well. As the U.S. and China continue a trade war, Wynn and Las Vegas Sands could be caught in the crossfire.
Both companies’ gaming concessions in Macau expire in 2022. And those concessions could be bargaining chips for the Chinese central government, particularly given the importance of LVS head Sheldon Adelson to the U.S. Republican Party. At the very least, Macanese or Chinese authorities could renegotiate less-favorable deals for the two U.S. operators.
Those expirations add another layer to the trade war risk already pressuring both stocks. And they make a case for, as noted short-seller Jim Chanos has argued, choosing local operators Melco Resorts & Entertainment (NASDAQ:MLCO) or SJM Holdings (OTCMKTS:SJMHY) instead. A loss of the concessions would be devastating to the two key U.S. operators (along with MGM Resorts International (NYSE:MGM), who has smaller relative exposure to Asia). And even if that risk has a low probability of occurring, its effect means investors need to pay close attention.
The Stars Group (TSG)
Online gambling company The Stars Group (NASDAQ:TSG) is looking for help from governments — not worried about harm. The acquisition of Sky Betting & Gaming made it a key potential beneficiary of sports betting legalization in the U.S. But cyclical worries in the gaming space have led TSG stock — perhaps surprisingly — to selloff sharply since federal courts paved the way for state-level legalization.
The Stars Group clearly sees a huge opportunity, however. It was announced as the official gaming operator of the NBA last week. It made a deal with regional casino operator Eldorado Resorts (NASDAQ:ERI) to run online betting in 11 states should legalization arrive. With the legacy poker business stagnant, and international expansion largely complete, TSG needs new U.S. markets to jumpstart growth.
So The Stars Group needs legalization, but more specifically, it needs online legalization. Online casino gambling growth remains stalled out, with Pennsylvania last year becoming just the third state to authorize online casino gambling. (Nevada allows online poker only.) Online sports betting remains largely unavailable so far as well.
Without help in the U.S., TSG might still be cheap, with a forward price-to-earnings ratio under 7 despite decent growth of late. If online gambling and online sports betting finally expand stateside, however, TSG could be a steal.
15 Political Stocks: Petrobras (PBR)
Petroleo Brasiliero (NYSE:PBR) — better known as Petrobras — is so entwined with the Brazilian economy that it actually has moved politics, rather than the other way around. The discovery of bribes at Petrobas mushroomed into the largest corruption scandal in Latin American history, leading to the impeachment of President (and former chair of Petrobras) Dilma Rousseff.
PBR shares have done nicely of late, buoyed by higher oil prices and progress in the resolution of the scandal. But political risk still exists. New president Jair Bolsonaro seems like good news for PBR stock, which indeed rallied as his election seemed more likely. His recent pick for PBR chairman suggests privatization could be on the way and at least a more “hands off” approach to PBR’s business.
But Brazilian politics can change rather quickly and lower crude prices may change the political environment as well, given Petrobras’ importance to the Brazilian economy on the whole. Some traders clearly have decided to lock in gains over the past few weeks. More may elect to do so if any signs of trouble re-emerge.
As of this writing, Vince Martin has a bearish out-of-the-money options position in TSLA.