When September arrived, stocks, almost like clockwork, started falling for much of the month. The upcoming election added another level of uncertainty for the market. Already weighed lower by coronavirus pandemic risks, a weak economy, and high government debt, investors need a game plan regarding election stocks ahead of voting day.
For starters, there are seven stocks investors definitely want to avoid leading up to the election. Though the outcome is unpredictable, one party’s win could devastate a sector and create selling pressure. For example, the healthcare sector, particularly the drug stores, face many unknowns. Also, the drug manufacturers may have new regulations ahead that will hurt profits.
The election stocks that investors should avoid are:
- Walgreens (NASDAQ:WBA)
- Cigna (NYSE:CI)
- UnitedHealth (NYSE:UNH)
- Canopy Growth (NYSE:CGC)
- Apple Inc. (NASDAQ:AAPL)
- Eli Lilly and Company (NYSE:LLY)
- Alibaba (NYSE:BABA)
Walgreens spent all of 2020 on a downtrend, with the exception of temporary rallies in March, June and August. The pharmaceutical retailer posted adverse sales impact of around $700 million to $750 million. Gross margins also fell.
A Democratic win would put more pressure on a drug company’s ability to raise prices. Markets punished WBA stock ahead of the elections to price in these risks. If the government forces the intermediate players to cut prescription fees and other costs, then Walgreens will continue posting worsening results.
CVS Health (NYSE:CVS) shares held up better but not by much. The company’s acquisition of Aetna diversifies its revenue stream away from its retail storefront alone.
Investors may model a single-digit revenue growth rate for Walgreens. This would imply a fair value in the low $30s.
Cigna trades at a discount with a price-to-earnings in the low teens. CI stock peaked at around $218 in June and fell steadily from there. Markets are afraid that the government will impose new regulations for health plan providers.
Fundamentally, Cigna is well-run with a steady growth in customers. Medical costs fell over the last decade, which helps profits. But if the government demands that it share those savings by cutting the prices charged to customers, the stock will continue falling.
For 2020, Cigna forecast adjusted revenue in the range of $154 to $156 billion. Adjusted income from operations will top $18 to $18.60 a share. So, the company’s strong prospects are attractive.
Investors may want to wait until the bearish sentiment eases before buying Cigna shares. The stock may not find a bottom until after the election. Until then, put Cigna on the watch list of election stocks.
UnitedHealth reported non-GAAP EPS of $7.12 in the second quarter. Revenue grew 2.5% year-over-year to $62.14 billion. For the last few months, UNH stock traded in a narrow range. If investors decide that healthcare plan companies face uncertainties ahead because of the election, that may change.
Election stocks like UNH may fall temporarily but will not stay there. The company used its deferral of services to increase its cash reserve. The well-managed firm is a good long-term investment. But in the near-term, investors should avoid the stock in case shares reverse and fall.
On Wall Street, analysts are bullish on the company and have a $348.25 price target (per Tipranks).
Canopy Growth (CGC)
The rise of cannabis stores in the United States could accelerate or slow down depending on which part wins. One thing is certain: companies that rely on growth in Canada will fare poorly. Canopy Growth rewarded investors as a trade but is trending lower overall.
On Oct. 1, Canopy and Acreage Holdings announced initial plans to bring THC-infused beverages in the U.S. next summer. Even if politicians do not interfere with Canopy’s ambitions, the company failed to pivot and grow. Interim Acreage CEO Bill Van Fassen said, “We see THC-infused beverages as a game-changer in U.S. cannabis, and we are excited to launch Canopy Growth’s unique beverage offerings to our core markets offering.”
The firms promised game-changing initiatives in the past, only to let down investors. For example, “cannabis 2.0,” or edible cannabis, did not accelerate Canopy’s revenue growth.
Apple is a solidly run company. Demand for iPhones supports the stock’s P/E in the 30 times range. A growing user base will lift services revenue, a high-margin business.
The Nasdaq’s slump in the last month combined with Apple’s weighting in the index suggests that investors should avoid adding AAPL stock until after the election. Markets have a habit of inadvertently selling good companies, including Apple, in times of panic. If that happens, investors will have a better entry price ahead.
In a 5-year discounted cash flow growth exit model, the stock has some upside. Conversely, if investors get the stock at a discount, the margin of safety widens, lowering risks.
Eli Lilly and Company (LLY)
Returning to the drug manufacturing sector, Eli Lilly shares fared poorly after peaking in the summer. If the elected party has renewed interest in attacking drug prices, LLY stock will fall further.
The company has a good opportunity ahead. For example, its amyloid antibody drug is in Phase II right now. Eli’s Chief Financial Officer, Joshua Smiley, said, “We think it’s among the best we’ve seen in terms of ability to clear plaque. If that plaque clearance in a mild to moderate setting has a clinical effect, we think this is the right drug to really test that in the trial’s design.”
The final stock on this list of elections stocks to avoid is Alibaba. Unlike infrastructure stocks that investors may buy ahead of the elections, hot China-based stocks may fare poorly. Alibaba has exceptional strength ahead but U.S.-China trade restrictions may hurt its short-term prospects. If the trade war attack on China escalates during the election campaign in the weeks ahead, investors may sell Alibaba shares in panic.
BABA stock trades close to yearly highs, so value investors are not getting a deal, regardless of the election risks. Still, Alibaba’s 11/11 Single’s Day often sets new sales records. And that happens after the Nov. 3 elections.
The company’s June quarter results are likely to repeat when released that same month. In its first quarter, Alibaba posted revenue growing 34% Y/Y to $21.76 billion.
On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article.