This article is part of Coins2Day ‘s quarterly investment guide for Q4 2020.
It’s been one thing after another for investors in 2020.
First came the novel coronavirus that threw many a shareholder for a loop. Then came a stressful summer in which the global economy moved in fits and starts, petering out from a quick recovery to a slower rebound. Now, with less than a month until the ballots will be counted in a polarizing U.S. Election, some are anxious about the outcome, wondering what a Biden presidency or a second Trump term would mean for their stock market holdings.
That anxiety partly reflects the fear of what a disputed election result could do to markets. Such uncertainty would likely mean volatile markets in the short term; indeed, some investors are already buying futures, options, and other derivatives that could pay off if markets swing wildly immediately following Election Day. And others are doing a bit of old-fashioned hand-wringing over whether the candidates’ stances on health care, Big Tech regulation, taxes, and trade could hurt their portfolios down the road.
But for such fretful types, market pros like Matt Benkendorf, chief investment officer of asset manager Vontobel Quality Growth, offer a reassuring reality check. “I think the election impact is generally overexaggerated,” Benkendorf tells Coins2Day. “Quite frankly, if we go and look back historically, the elections themselves don’t have as tremendous outcomes [on the market] as people believe. It’s the underlying health of the economy and growth there and corporate profit growth, ultimately, that are going to impact stock prices.”
The economy isn’t nearly as healthy as it could be, of course, and there remains plenty of uncertainty about how long it will take for it to recover from the pandemic. Money managers in general have earmarked a few key sectors to steer clear of (among those who spoke with Coins2Day, for example, most are avoiding financials and energy). And many recommend looking to stocks that have defensive elements to them: Think shares in steadily growing companies that are able to deliver reliable dividend yields.
That’s certainly not to say that the race for the White House means nothing, portfolio-wise. A Biden presidency may mean higher corporate taxes but perhaps increased government spending, while a status quo Republican administration could translate to rising trade tensions but more relaxed taxes—and either result could create winners and losers. In the near term, Saira Malik, head of global equities at Nuveen, believes the biggest risk is volatility from a contested election. But longer term, Malik believes we’ll return to a moderate growth environment akin to the days BC (before coronavirus).
With that in mind, as Malik notes, the question now is “What can you own in either scenario, if you don’t want to place your stake in either camp?” To help investors answer that question, Coins2Day asked four top portfolio managers to nominate their stocks for a portfolio that’s as election-proof as possible, the kind that might hold up nicely for the next four years or more.
Concentrate on the consumer
One element of the economy that isn’t in the crosshairs for the 2020 election? Consumer spending. Though the pandemic delivered a hit to employment and incomes, and spending on optional activities like travel has plummeted, consumer spending still makes up roughly 70% of the economy.
So portfolio managers are scanning the consumer economy for steadily growing companies that tend to perform well in all environments and can piggyback on new trends in the way we’re spending. Most of these companies fall in the category of consumer staples, Malik explains: “They’re defensive; they’re going to perform well because of the types of goods they produce that are needed in any kind of environment; and you can find some yield there.” (Yield is something investors are particularly eager to capture: With interest rates likely to stick at near zero through at least 2023 regardless of who is in the White House, and the average S&P 500 dividend yield having slipped to 1.7%, significant dividend-payers look even more attractive.)
One such stock Malik favors is Lowe’s (LOW, $171), chief rival of home improvement retailer Home Depot. She likes the stock’s 1.4% yield and the fact that the company is poised to serve a housing market that’s booming once more. With more people investing in their homes “because their workspace can now be their house,” Malik sees Lowe’s as having a “whole host of factors that work in their favor.” In particular, she believes Lowe’s will benefit from a boost in e-commerce as the company upgrades its website; from cost controls as it improves its supply chain; and from the return of its professional crowd as more customers feel comfortable using contractors again. (Malik prefers Lowe’s over Home Depot for its significantly lower P/E.)
Eric Schoenstein, a managing director and portfolio manager at Jensen Investment Management, likes PepsiCo (PEP, $138) for its 3% dividend. But he argues the stock isn’t “just yield for yield’s sake.” “They’re producing real growth and revenues and earnings and free cash flow,” he says. Although what PepsiCo calls its “away from home” sales (which make up roughly 35% to 40% of total sales, Schoenstein says) have taken a hit this year owing to closures of venues like baseball stadiums and restaurants, Schoenstein argues that its convenience store and at-home products (including snack-at-home staples like Quaker Oats and Cheetos) have helped to somewhat stem the losses. Moving forward, he anticipates earnings growth in the mid-to-high single digits.
The infrastructure play
David Bianco, the chief investment officer for the Americas at DWS Group, is making the call: “A lot of people think that infrastructure is going to be the play postelection” no matter who wins. There’s bipartisan support for increased investment in infrastructure, and Bianco “wouldn’t doubt there’s some kind of investment package” likely to emerge from Congress. But from Bianco’s perspective, this isn’t your grandpa’s “infrastructure.” The term doesn’t only mean roads and bridges, but also includes the “new economy structure, which to me is an intelligent power grid, 5G communications.”
One sector that Bianco argues is “low-hanging fruit for good return,” even amid political uncertainty: utilities. Not only are utilities “very mature, very reliable income-producing businesses,” he notes, but moving forward he thinks electric companies in particular will play an important role in the rollout of 5G technology: “The electric poles are owned by the utility companies, and they will play a big part in installing 5G cells and will receive some rental income for the space” over time.
Such trends are likely to boost NextEra Energy (NEE, $301), a big player in the power grid and in renewable energy. The stock currently trades at around 30 times forward earnings with a 1.8% dividend yield. NextEra is the parent of utilities Florida Power & Light and Gulf Power, and it has a heavy focus on investing in clean energy. The company has been able to grow under a Republican administration, even without the full-on clean-energy support likely to come with a Democratic President. As NextEra’s CEO James Robo declared on a recent earnings call: “We always position our business to try to win, regardless of the outcome of elections.”
Nuveen’s Malik also says she expects a postelection infrastructure boost. That’s likely good news for Terex (TEX, $25), a producer of aerial work platforms and equipment used for construction. The company has taken a big hit owing to the coronavirus and recession, with revenues falling more than 25% in the past 12 months. It’s also a bit on the expensive side, trading at roughly 35 times trailing earnings from continued operations (the industrial sector average is currently 21). But Malik believes Terex is “a survivor,” and argues an expected rebound in the company’s aerial work platforms division (roughly 60% to 65% of its sales) will be the “main driver” in Terex’s earnings recovery. She highlights Terex’s solid balance sheet, noting that “they have no debt due until 2024 [and] positive free cash flow.” She also commends CEO John Garrison for streamlining the company through the sale of segments like cranes in 2019. “This will be a company that returns to normalized earnings over time and survives the recession,” she argues.
To be sure, more infrastructure and fiscal spending is not a done deal, and many investors are eager to make sure their stocks aren’t fully tethered to more government cash. That’s why Jensen’s Schoenstein likes 3M (MMM, $168), the multifaceted industrial behemoth whose products include components for aircraft, transportation, rails, and commercial vehicles (and, of course, personal protective equipment). “Its individual industries can work hand in hand to help offset each other in tough times but grow together in good times,” Schoenstein argues. He believes 3M’s business model is “a bit more resilient” in that it’s not “solely reliant upon huge stimulus spending” but can still be a beneficiary of those forces. Plus, the stock comes fairly cheap at 19 times forward earnings with a 3.5% dividend yield.
Surprise sectors: Tech and health care
Investors besieged by myriad headlines and political rhetoric may think of these two sectors as among those facing the biggest threats from the election. Health care could see some big changes, for example, from an expansion of a “public option” for insurance to White House efforts to lower drug prices. Tech, meanwhile, faces criticism from lawmakers over its size and market power, along with the growing conviction among some investors that their stock prices have just become too high. But portfolio managers still see plenty of opportunities that should skirt any major headwinds in either space.
DWS’s Bianco, for one, doesn’t “think you’re going to get any difficult legislation” around tech from either party (“There’s competition of Western tech versus Eastern tech, and I don’t think U.S. Politicians are going to do things that hobble the ability of Western tech to compete,” he argues).
Still, some Big Tech companies will be more vulnerable than others. That’s why Benkendorf favors Microsoft (MSFT, $211), which is “not the focus of government ire right now on either side of the aisle” compared with peers like Amazon. With a growing and stable subscription software business, a booming cloud platform in Azure, and a recent M&A spree, Benkendorf thinks Microsoft “continues to be undervalued and underappreciated even despite the stock doing well.” At 32 times forward earnings, Microsoft’s valuation is dwarfed by many of its high-flying peers.
Jensen’s Schoenstein is equally convinced Microsoft has “insulation from some of the regulatory concerns,” pointing out the tech giant faced these troubles two decades earlier and lived to tell the tale. He notes Microsoft’s tools and products (including Teams, its business communication platform) are helping people “pivot into this work-from-home environment.” That’s likely to stick around in coming years, which could all translate to low-double-digit earnings growth, Schoenstein estimates.
Health care is another arena in which, as Benkendorf argues, investors may be too focused on the “headline fears”: “People sort of think, ‘Oh my goodness, if you get a Democratic supermajority [then] this and that happens,’” he says. But “if you have great businesses that add tremendous value for customers, I think medical devices is still a relatively safe space.”
One company that fits that bill for Benkendorf is Medtronic (MDT, $108), a medical-device manufacturer he deems a “safe, well-run, steady, predictable grower.” The company makes devices like pacemakers and insulin pumps, and trades at roughly 22 times forward earnings—a discount to the sector at large. Benkendorf says Medtronic is seeing strong growth in its Micra AV device, a miniaturized pacemaker that doesn’t require wires. He also believes the company’s new CEO, Geoff Martha, is “looking to push more autonomy down to the business units, which should ultimately lead to a more nimble organization.” Even if a blue wave washes over the U.S. Health care system, Benkendorf argues, “what we had under Obama was not a bad situation for those companies by any means.”
Beyond the U.S.
With election headwinds stateside, some portfolio managers are looking for promising growth outside the U.S. Altogether—with an eye to East Asia in particular. To be sure, portfolio managers agree tensions between the U.S. And China won’t disappear, no matter who is in the White House in January. But that’s not stopping them from investing in companies that are strong enough to defend against what Vontobel’s Benkendorf calls “legitimate” yet “heated political rhetoric.”
None is quite as formidable as China’s Alibaba Group (BABA, $301). The massive retailer has an Amazon-like ingrained foothold among China’s consumers, but it trades at roughly 29 times forward earnings, compared with nearly 89 for Amazon. Nuveen’s Malik believes Alibaba has “an attractive valuation, strong ad growth in e-commerce,” yet is “less levered to the economy” than other retailers; she also likes that it’s moving into local supermarket services.
Benkendorf, meanwhile, is bullish about the upcoming IPO of fintech Ant Group, of which Alibaba owns roughly 33%, which he says, “should crystallize an additional piece of value within [Alibaba’s] share price.” And rivalry between the U.S. And China may pose less of a threat to Alibaba than to other companies, because Alibaba is a “very domestically focused business, and China has a very deep domestic market,” Benkendorf notes.
Elsewhere in Asia, Japan-based Ibiden, which makes printed circuit boards and integrated circuit packaging, is a lesser-known but equally appealing name. Malik notes the “next generation CPU market is in high demand from Intel and AMD,” and argues Ibiden is “the leader” in packaging—a space with high barriers to entry. She expects a “multiyear period of growth as Ibiden expands capacity to meet volume demands,” which should translate into higher profit margins.
Malik also favors Taiwan Semiconductor Manufacturing Co. (TSMC) (ADR: TSM, $88), the world’s largest contract chipmaker. She likes TSMC in particular because it’s benefiting from the global buildout in 5G. Smartphones make up roughly half the chipmaker’s business, Malik notes, and “as Apple ramps up for the iPhone 12, they benefit.” TSMC makes complicated, advanced products that pose huge barriers to entry for competitors. And Malik predicts its growth will be driven by “high-performance computing for data centers” of the kind being built by Amazon, Microsoft, and Google (chips for such cloud computing account for roughly 30% to 35% of revenues, she notes). TSMC also has a major potential new customer in Intel, which has signaled that it might subcontract more of its own chips to TSMC. Malik estimates that business could add 20% in incremental revenue to the company over the next five years. The stock has room to run, trading at 25 times forward earnings—below the current semiconductor industry average at 29.
All stock prices calculated as of Oct. 8, 2020.
Explore Coins2Day’s Q4 investment guide:
- The biggest economic threat facing the next administration
- These 6 economic charts tell the story of Trump’s presidency
- What Wall Street’s favorite election indicators say about who will win the White House in 2020
- 10 stocks to buy now: These names should perform well no matter who wins the White House
- ESG investing is bigger than ever. Here’s how you can save the world, and your portfolio
- This year’s ‘October surprise’ could impact your portfolio for years to come
- The next President will hold a lot of sway over Tesla’s biggest profit center
- Q&A: Former Commerce Secretary Penny Pritzker talks America’s R&D problem, taxes, and the country’s economic outlook
