Stocks Set To Prosper Under The Obama Administration

This is a guest post by my friend Jon. I do not own any of the securities mentioned in this post.  As always, do your own research before making any purchasing decisions.

I’m not sure that you’ve noticed, but America has a new President this week. Throughout his campaign, Obama promised that things would change in his administration and now some of those changes are about to become reality. Obviously, there will be some industries that profit from these new policies, and anticipating this could give your portfolio a good head start, even in a down economy. While there are a lot of policies that are up for debate, there are two that I find the most interesting right now.

One of the ways that Obama believes we can get out of this recession is by spending, and spending heavily, on infrastructure throughout America. The bill that is being proposed will put over $30 billion dollars towards building bridges, highways and other large projects. When this much money is mandated, it alters the normal supply and demand of an industry and allows for tremendous profits for well positioned firms. So I first began looking at firms involved in heavy machinery that would likely be inundated with sales calls to re-build America’s highways.

Starting with Caterpillar, I put together a list of other companies in the same sphere. After looking over their business units and financial statements, the main ones I was interested in were CAT, United Technologies (UTX) and then Terex Corp (TEX). I felt that they were all good companies that were:

1. Relatively Undervalued – P/E’s under 10
2. Solid Management Effectiveness – ROE’s between 20 and 40 percent.
3. In Control of their Debt Level – Uh oh. This is where things started to fall apart. CAT has a debt / equity ratio over 3.5, while UTX has a current ratio of only 1.2. TEX came out looking great again due to their D/E ratio of .6 and Current Ratio over 2.1.

So, based on this analysis, I would recommend TEX as the best play to take advantage of Obama’s “New-New Deal”.

Another policy that will likely pass, although this is more because of the Congress than Obama, is the Union card check bill. This would allow workers to unionize through open voting, as opposed to secret ballot. This is expected to increase the strengths of unions throughout the country, but critics say that this will be bad for business. One radio host has theorized that businesses will counteract this by minimizing their supply of “employees”, although not necessarily “workers”. He believes that temporary staffing agencies will receive a flood of requests for workers who, because of their temporary nature, will not be eligible for union membership. While I am not 100% sure that this is how things will sort themselves out, I did look over a few staffing companies to see who might be a good bet. The three I analyzed here were Manpower (MAN), Spherion (SFN), Kelly Services (KELYA) and Kforce (KFRC). Because this is a much less capital intensive industry than heavy equipment, I looked at slightly different financial indicators.

1. Profitability – Not starting of well. This industry obviously operates on razor thing margins, with SFN and KELYA below 1% on Profit Margin and 2% Operating Margin. MAN (1.2 & 3.3%) and KFRC (3.1 & 5.1%) are both slightly better.
2. Management Effectiveness – I am ready to drop SFN and KELYA from this analysis after their ROA and ROE numbers are also significantly below that of their peer groups. KELYA especially has low numbers, at 1.6 and 3.2% respectively. MAN and KFRC again bring in respectable numbers for their industry here.
3. Undervalued Sales – Because this industry creates income based on it’s people, as opposed to a significant natural resource, capital investment or R&D, I also wanted to see how their sales were valued by the market. Both of the firms I kept analyzing (MAN & KFRC) had very low Price/Sales ratios (.1 & .23), so they both stayed on my list.

Because neither MAN nor KFRC had anything in their numbers that scared me away, I went to my favorite screening tool on the web, www.magicformulainvesting.com (TEX is on this list as well) and tried to see if either one was highly rated. While neither is a star, I did find that Manpower was on the list when compared against equal sized companies. So while both companies look good to me, I would have to recommend MAN in this instance.

So, after looking over some of the polices that might be coming down the pipe in Washington, and figuring out which industries might be best suited to prosper under this new administration, I came up with two stocks that I feel comfortable recommending. There are a lot of other issues that will come up throughout the political process, and I have a feeling that Obama’s polices will affect business more so than we would normally expect, so keep a lookout.