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Spreadsheet
Market Volatility
As you read this, Americans are voting or counting them in their presidential election. However, this time this process could last days, even weeks, given mail-in ballots, but also Trump’s threat to not concede if Biden wins. Remember Gore vs. Bush 2000? Add to this, the rising number of Covid cases hitting the United States, which still lacks a cohesive plan to control the virus. Given this chaos, investors are bracing themselves for market volatility, though the election day rally is following historical script. I won’t make predictions, but will present some likely scenarios per sector.
US-China relations
Big tech gains if Biden’s Democrats take the White House, and especially if they also take the House and Senate in a “blue wave” sweep. Biden will relax tensions between America and China, which will make American companies with strong business interests in the Middle Kingdom attractive.
Starbucks stock should benefit. Even cautious analysts like Gordon Reid commend SBUX stock for building its presence in China where the economy is humming as there is no lockdown at the moment. Meanwhile, North Americans here are still willing to line up on the sidewalk for their java, demonstrating brand loyalty and/or latte addiction. Recently, SBUX handily beat its estimated EPS by 11% at a reported 79 cents while revenues were in line.
Looking head, 26 analysts expect a 21% increase in sales and per-share earnings to skyrocket 242% in the coming 12 months. True, Starbucks’ PE has quadrupled in the past year to 109x, which will give some investors pause. Overall, though, it looks like there is still room to run and for Starbucks to expand further in China, if Biden wins. Conversely, if Trump wins a second term, then the trade war will continue. Politics could constrain Starbucks’ plans in China, though that didn’t stop SBUX stocking leaping 50% during Trump’s first term. Then again, investors hate uncertainty, especially geopolitical.
In contrast, no industry is more vulnerable—or poised—in this context as semi-conductors. Morgan Stanley observes that semis boast the highest revenue exposure to China at 52%. If Trump wins, then the semis risk sliding if he resumes his trade war. However, if Biden triumphs, then the semis will likely soar.
Qualcomm is one company that will benefit, given its growing business from emerging smartphone makers, including Oppo and Vivo. Another tailwind is the long-awaited adaptation to 5G, including Apple‘s just-released iPhone 12 which uses this advanced network. Investors have already rallied around Qualcomm and other semi stocks. QCOM stock is trading near 52-week highs after a strong rise since August. Accordingly, its PE has leapt from 27x on June 30 to the current 51.3x. However, the upside potential is strong enough to warrant some risk, plus the 2.11% dividend offers a little cushion.
Energy
I wrote about this recently, so I will quickly recap here. It’s well-known that Biden will throw his weight behind renewable energy, while Trump will continue to support obsolete fossil fuels, like coal, to please his voting base. Though Trump champions these fuels, oil stocks in the S&P 500 have actually plunged 57% during his term. Meanwhile, in the past two months, there’s been a surge in renewable stocks both here in Canada (witness Northland Power) and America. So, that prediction is already baked in.
The question is, will we see even more room to run if Biden wins? Probably. NextEra Energy is the green energy play to consider in America. Investors have a chance to enter, because after a strong run-up earlier this fall, these stocks pulled back recently as if pumping the brakes on a speeding train. Most of these green stocks pay robust dividends around 4%, so they’re attractive to income investors. Of course, they score big in ESG.
Now, if Trump wins, expect these green stocks to slip, though I don’t expect them to slide dramatically. After all, the trend favouring renewables has built enough momentum that it will continue to gain traction.
Stimulus bill
Washington will likely pass a much-needed new round of stimulus regardless of which party wins, but the consensus feels that a “blue sweep” will amount to a larger package that won’t face resistance from Republican Mitch McConnell. If those dollars trickle into the pockets of Americans, some will spend it on improving their homes during Covid.
Lowe’s stands to benefit. Low interest rates are a third tailwind, encouraging U.S. home building and buying. Lowe’s enjoys an edge over its rival, Home Depot, because its locations are less centred in urban areas which is plus in the age of social distancing. Management has also been driving business online. It’s a positive sign that Lowe’s recently pledged to hire 20,000 new workers to absorb holiday demand and beyond.
Lowe’s has beaten the street in its last four reports, while its PE of 21x is actually lower that the 34.55x of a year ago. Currently trading at $160, Lowe’s is $20 off recent highs, thanks to the October sell-off. Lowe’s pays only a 1.52% dividend, so you’re buying this for appreciation.
(Disclosure: I own shares of Northland Power.)
