USA election season is upon us and 2016 has been a truly interesting year. The candidates this year are the most disliked candidates in history. On one hand, you have the Republican candidate, Donald Trump, whose campaign can be described, at best, as anti- politically correct, and, at worst, as racist and bigoted. On the other hand, you have Hillary Clinton, who has been marred with scandal after scandal and the electorate in general just does not see as particularly trustworthy. With barely more than a month to go, one of these two people will be the new president of the USA.
With each party having their own agenda and points of view when it comes to driving policy, it can be natural to assume that the presidency, being able to affect policy decisions, would also be able to affect the stock market.
However, history shows that the S&P 500 has risen an average of 6.5% in the first year of the presidential term, regardless of a sitting Democrat or Republican. Despite the general held belief that a Republican, with their Big Business approach, being good for the market, there is no evidence of a Republican president being better for the stock market. In fact, Democrat presidents seem to have a slight edge over their counter parts, although other macro events would do better to explain the rise and fall of the stock markets.
Historically, during an election year, the S&P 500 has risen 81% of the time.
|During the election year itself, the highly regulated industries like Financials and Utilities seem to perform best, which is not surprising, as the election year is typically a lame duck session, with the current government unable to pass many new regulations.|
The year after the election year, Consumer Discretionary, IT, Industrials, Energy and Healthcare does tend to perform, as the market recovers from the uncertainty of which party will be in power.
Chances of winning?
Currently, Fivethirtyeight, a poll aggregation website, puts the chances of Hillary winning at 57.6% and Donald Trump at 42.4%, a little better than a coin toss for either party. The past few weeks have not been good for Hillary and if the current momentum continues, her chances to win might equal Trump’s by November. There will be three presidential debates and one vice presidential debates in the next few weeks and the performance of the candidates at each might help determine who ends up winning the presidency.
The party platforms are in general proposals for how the candidate intends to run the country. While it is not a guarantee that the proposals in the platforms will eventually materialize, it does give a general sense of the direction the candidate will want to take the country. In this note, we will focus on Energy and Healthcare, as these are the sectors where the candidates differ greatly and are likely to have market impacts.
In terms of Energy, Donald Trump favours more traditional energy sources, and advocates a rescinding of the Climate action plan and Waters of the US rule, effectively allowing the drilling for oil and other fossil fuels in currently protected areas. He has also promised to invest heavily in the coal industry. In contrast, Clinton has pledged to expand investments in renewable energy, proposing that over half a billion solar panels to be installed by the end of her first term, a nearly 700% increase in solar capacity by 2020.
For Healthcare, Clinton proposed to increase the Affordable Care Act (ACA), also colloquially known as Obamacare, promising to reduce out of pocket cost ( deductibles) for citizens. Trump however, has promised to repeal the ACA, proposing a state level Medicaid for citizens instead. Both parties do agree that rising drug cost is an issue and have promised to fight to keep drug cost down. Clinton will legislate to keep excessing cost down, while Trump says he will negotiate aggressively with drug companies and remove barriers to entry for generic, non-patent alternative products.
Both parties’ platforms can be found respectively:
With the platform of each candidate in mind, we have tried to identify some companies that would likely benefit from a Trump or Clinton presidency and the list is as follows:
1. Energy – Exxon Mobil (NYSE:XOM) & First Solar (NASDAQ:FSLR)
|Exxon Mobil Corporation is one of the world’s largest oil producers and refiners. A Trump presidency will likely be good for the fossil fuel industry and we believe that XOM will be able to benefit from it as well as a number of other factors. XOM is currently trading at USD 83.54 per share, with a PER of 33.19 and a Dividend yield of 3.59%.|
Oil Price mild recovery – Since hitting a low of USD 28.50 in January 2016, WTI Crude oil prices have rebounded above the USD 40 per barrel mark and is trading at USD 46.46. The US Energy Information Administration estimates that production and consumption will level out in Q1 2017. Further reduction in Capex for the sector seems to point to a likely slowdown in supply.
|XOM Low development cost and High Inventory – XOM has been focusing on low cost production during this period of low oil prices, being able to cut the development cost from above USD 20 per barrel to below USD 10 per barrel. It also has an estimated 9 years of inventory sustainable at the WTI USD 40 per barrel.|
First Solar is producer of photovoltaic (PV) solar energy solutions. The company designs, manufactures and sells PV solar modules and if Clinton wins and goes ahead with her plan to expand solar capacity in the USA, we believe that FSLR will greatly benefit from that. Of all the USA listed solar panel producers, we believe FSLR to be the most financially sound, being able to generate a profit and also having more cash equivalent than debt. FSLR is currently trading at USD 35.42 with a PER of 5.20. It is not currently paying out a dividend. The sector has been beaten down significantly recently due to supply of cheap solar panels from China. We believe that FSLR is undervalued as a result of the following factors:
Trading below book value – FSLR’s book value per share is USD 56.71, its tangible book value is 52.61. While FSLR’s PPE is highly specialized and there might be some difficulty in the event of liquidation, FSLR’s current trading price implies a 40% discount to book value.
Competitive CdTe Tech – The solar panel industry is primarily manufacturing and selling the same technology; Crystalline Silicone(C-Si). However, C-Si wafers are relatively expensive to produce due to raw material costs. FSLR on the other hand, manufactures and sells what is known as thin film solar cells, based on cadmium telluride (CdTe) technology. CdTe panels are cheaper to produce compared to C-Si. FSLR currently produces panels at USD 0.40 per watt, while China’s Trina Solar’s (currently the world’s top solar panel maker) average production cost is USD 0.46 per watt. FSLR’s panels are theoretically 5% more efficient as well, under the right conditions. Given the oversupply, it is unsustainable without government intervention for Trina Solar to keep supplying at current prices. If FSLR is able to ride out the current over supply, it could be in a good position to rebound.
|2. Healthcare – HCA Holdings (NYSE:HCA) & Unitedhealth Group Inc (NYSE:UNH)|
Regardless of candidate, we believe that pharmaceuticals are likely to be beaten down due to the spotlight on high drug cost. As such, we believe that hospitals or private insurance companies would be more likely to be impacted positively depending on the candidate.
HCA Holdings is a healthcare services company, they operate hospitals and related healthcare entities. Expansion of the ACA under Clinton might generate more traffic to hospitals. HCA is currently trading at USD 76.38 with a PER of 13.18. The company currently does not pay a dividend. We feel that the stock is undervalued based on:
· Aging Demographic – HCA has been able to select key geographic markets with aging populations, which led to about a 2% growth in same facility equivalent admissions
· Expansion of ACA – since the introduction of the ACA, the percentage of uninsured in America has fallen drastically. This is significant because uninsured people do not typically pay their medical bills, leading to high doubtful revenue. If Clinton is able to expand the ACA further, Healthcare providers may be able to collect more revenue for the services they provide.
UnitedHealth Group Inc is a diversified healthcare company. UNH’s private insurance business is its biggest source of value. UNH is currently trading at USD 141.04 with a PER of 22.07. The company has a dividend yield of 1.77%. While the ACA has expanded the number of people with insurance, it has also forced UNH to take on unprofitable business. Under a Trump presidency, if the ACA is repealed, UNH might be able to be more discerning and pick more profitable clients.
USA’s market leader – UNH is the market leader in private health insurance. If Trump becomes president, it is highly unlikely a Public Option will become available as an option. As such, UNH should maintain its position as the market leader.
Withdrawing from ACA – UNH announced that it was withdrawing from most of the ACA state exchanges by 2017. 2015 ACA related losses came up to USD475 mn and 2016 is estimated at USD 650 mn. UNH is looking to reduce ACA related businesses from 1,200 counties to 156. With the reduction in unprofitable business, UNH should be able to increase its margins.
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