I’m a current events junkie, and nothing is quite so exciting as presidential elections. But 2020’s race for the White House is shaping up to potentially be the most exciting in decades.
That means that smart long-term income investors might have the opportunity to not just profit from rising 2020 political uncertainty, but potentially lock in truly spectacular long-term returns and generous, safe and steadily growing dividends.
So let’s take a look at the state of the 2020 presidential election right now, and why three stocks, in particular, AbbVie (ABBV), Comerica (CMA) and Enterprise Products Partners (EPD), might represent three of the best ways to profit from irrational market fear that might be coming later this year.
Democratic Primary Is Becoming Increasingly Chaotic Creating The Chance for the First Brokered Convention Since 1952
Joe Biden was until recently, the front runner for the Democrats and many expected he would easily lock up the nomination. Then people started voting and things now look very different.
(Source: Real Clear Politics)
Biden is now barely ahead of Michael Bloomberg who just made the Nevada debate and has spent over $300 million on his campaign. He says he will spend $300 million more…by Super Tuesday alone. Bloomberg (the news agency) is reporting that the billionaire (worth $61 billion) is spending $1.4 million per day on Facebook ads in Super Tuesday states.
For context, Trump spent $2 million in the final week on Facebook ads which shattered records on social media ad spending.
If Biden comes in second or third in Nevada, then Biden’s status as the centrist front runner could be shattered. Consider these latest polls.
In Nevada Biden has fallen to second and the latest poll shows him coming in 4th behind Warren and Buttigieg.
(Source: Real Clear Politics)
Even Steyer, the other billionaire in the race, has a shot of overtaking him in Nevada.
If Biden has a poor debate performance or merely comes in 3rd or 4th in a state where he was supposed to do well in (due to 33% Latino vote), Bloomberg could overtake him as the centrist front runner.
That’s because the latest polls from Super Tuesday states, the first where Bloomberg is actually on the ballot are not good for Biden.
(Source: Real Clear Politics)
Bloomberg is now 2nd in California.
- In North Carolina Bloomberg is tied with Sanders at 22%, with Biden in 3rd at 20%.
- In Maine Biden is 4th, behind Sanders, Buttigieg, and Bloomberg.
- In MA Biden is a distant second to Warren (her home state)
- In Texas Biden is 2nd to Sanders (hardly a liberal state)
- In VA Bloomberg is tied with Sanders for 1st at 22%, with Biden in 3rd at 18%
- In OK, Bloomberg is leading at 20%, with Biden in 3rd (behind Sanders) at 12%
- In FL Bloomberg is 1st at 27% with Biden 2nd at 26%
This doesn’t mean that Biden is necessarily doomed, he will likely get some amount of delegates in most states. BUT failing to win so many states where he was previously the favorite means the following in terms of delegate math.
Bloomberg could now win slightly more delegates than Biden. What does this mean in terms of who will likely win the Democratic nomination?
The delegates are now expected to be split so many ways that “no one”, ie a brokered convention, is now the most likely outcome.
And that’s before NV and SC vote, and Biden failing to win either state could swing his momentum even more into the red before Super Tuesday.
We haven’t had a true brokered convention since 1952 and if no one wins on the first ballot, then Super Delegates, like Obama, Pelosi and other insiders will get to weigh in.
In 2016 Sanders got 4% of the Super Delegate vote.
In other words, the chaos we saw after Iowa, which continues to result in ever more political uncertainty, could get even worse, peaking in mid-July.
In the meantime, certain companies are at risk of short-term market freakouts over the prospect of major regulatory reform to healthcare, energy and financial industries.
3 Stocks You Might Want to Buy Today…But Especially During Potential 2020 Freakouts Over a Possible Sanders Presidency
During elections, politicians make grand promises, including Bernie Sanders nearly $100 trillion in proposed spending over the next decade. Sweeping reforms can shake markets, as seen when healthcare stocks fell into a correction in early 2019.
I can’t tell you whether or not that will happen again, but healthcare, energy, and finance are the most at risk from potential regulatory changes that certain Democrats have proposed.
Moody’s and Morningstar both agree that the probability of significant regulatory changes is “5% or less” over the next decade.
That is an assessment I agree with based on the current consensus 2020 Congressional forecast.
Right now it appears as if Democrats will win four Senate seats and lose 10 in the House.
That would mean a very slim four-seat majority in the House and a 50/50 tie in the Senate, with the VP acting as tie-breaker.
The Affordable Care Act (aka “Obamacare”) was the most sweeping healthcare reform in decades and that required 60 Senate seats to overcome the filibuster. A 50/50 senate and a House majority of four seats is such a slim majority that even if Sanders did become president I would not lose sleep over the prospects of any major reforms actually occurring.
(Source: Dividend Kings Master List)
That’s why I recommend considering AbbVie, Enterprise Products Partners and Comerica as healthcare, financial and energy stocks right now, but especially if they were to sell-off over political fears.
- average quality: 9.3/11 blue chip (S&P 500 average is 7.0 and aristocrat average is 9.7)
- average dividend safety: 4.3/5 above-average (S&P 500 average is 3 and aristocrats 4.7)
- average yield: 5.4% vs 1.8% S&P 500 and 3% to 4% most high-yield ETFs
- average valuation: 32% undervalued vs S&P 500 14% to 25% overvalued
- average dividend growth streak: 12.0 years = dividend achiever
- average 5-year dividend growth rate: 17.3% CAGR
- average analyst long-term growth consensus: 7.7% CAGR vs 6.3% S&P 500 since 2000
- average PE ratio: 9.1 vs 10.3 S&P 500 on March 9th, 2009 Great Recession low
- average PEG ratio: 1.2 vs 2.26 S&P 500
- Average credit rating: BBB+
- average 5-year total return potential: 5.4% yield + 7.7% growth + 8% CAGR valuation boost = 21.1% CAGR (16% to 26% CAGR with 20% margin of error)
These are all companies I own, have been buying aggressively in recent weeks, and would happily chase to the bottom during any broader market or company-specific corrections.
While the risk of massive regulatory disruption is never zero, it’s important to remember that proper risk management is about diversification and proper margin of safety. At an average PE of 9.1, these three companies are priced for about 1% to 2% CAGR growth forever.
In reality, analysts expect about four times that growth rate. Will things go wrong for ABBV, EPD, and CMA in the future? You bet. But guess what?
ALL BUSINESSES ARE LOOSELY FUNCTIONING DISASTERS, AND SOME ARE PROFITABLE DESPITE IT.
At 30,000 feet, the world is beautiful and orderly. On the ground, it’s chaotic and confusing. Nothing ever goes to plan. Surprises lurk around every corner. Things are constantly breaking. Someone is always upset. Mistakes are made daily. Expecting anything less is being out of touch with reality. And remember, just because you’re now aware of it doesn’t change reality. It was that way before, you just didn’t realize it.” -Brent Beshore adventure.es (private equity firm)
Skilled management, which all these companies have, is what shareholders count on to overcome the numerous challenges that represent any companies risk profile.
Buying quality income-producing assets at single-digit multiples is one of the best ways to ensure you are properly compensated for any stock’s risk profile.
Private equity has been closing deals at 12.3 times EBITDA. The average Shark Tank deal over 10 seasons was 7.0 times earnings/cash flow.
These three companies, whose yield is three times the market average have an average EV/EBITDA of 9.5 and their 9.1 average PE represents a earnings yield risk premium (earnings yield – 10-year US treasury yield) of 9.5%.
That’s 2.6 times the 3.7% average earnings yield risk-premium of the S&P 500 over the last 20 years. These are blue-chip quality companies, trading at lower multiples than the S&P 500 bottomed at after the Great Recession, with nearly three times the reward/risk ratio.
Such are the kind of investments that I did not just recommend for my readers and Dividend King’s members but make myself in my retirement portfolio, where I keep 100% of my life savings.
Bottom Line: Elections Almost Never Harm Strong Companies So Rising Political Uncertainty Is a Potentially Great Opportunity to Profit in 2020 And Beyond
I can’t tell you what will happen with the Democratic primary or the general in November, no one can.
What is certain is that we’re sure to get surprises and the media will likely exaggerate the importance of each primary and poll.
Given the likely outcome of the 2020 Congress, nothing significant is likely to happen. This means that any potential freakouts by Wall Street in healthcare/energy or financial stocks will probably represent one heck of a buying opportunity.
AbbVie, Comerica and Enterprise Products Partners represent three quality, undervalued high-yield stocks that I own and plan to keep buying on any further weakness.
It’s possible that Wall Street does the sensible thing and shrugs off political uncertainty entirely.
(Source: AZ Quote)
But if it doesn’t I and the Dividend Kings stand ready to profit from the kind of knee-jerk overreaction that has made prudent long-term investors a fortune in the past, and will likely continue to do so in the years and decades to come.
SPY shares were trading at $335.27 per share on Thursday afternoon, down $3.07 (-0.91%). Year-to-date, SPY has gained 4.17%, versus a 4.17% rise in the benchmark S&P 500 index during the same period.
About the Author: Adam Galas
Adam has spent years as a writer for The Motley Fool, Simply Safe Dividends, Seeking Alpha, and Dividend Sensei. His goal is to help people learn how to harness the power of dividend growth investing. Learn more about Adam’s background, along with links to his most recent articles. More...
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