Trumpian winners


In my last column, I discussed some winners and losers in the immediate aftermath of Donald Trump’s election victory.

Now that he has become President Trump, selected his cabinet and begun his administrative duties, it’s time to deduce how a Trump administration may favor or disfavor companies and sectors in 2017.

Of course it’s already assumed that certain Trump-ian absolutes, like a giant Mexican border wall and a major infrastructure upgrade will benefit obvious players like companies making steel rebar and delivering concrete.

Plus “The (President) Donald” has alerted us to other “losers,” like the New York Times and Vanity Fair magazine. So the following is a brief synopsis of less-obvious winners and losers in my view.

 

Trump

 

 

Winner: Defense

Yes, of course, candidate Trump made a big deal about bolstering the U.S. military. This even though the $1.6 trillion of U.S. military spending in 2015 was larger than the military spending of the next seven countries combined.

But hey, who doesn’t need another F-35? The key here, however, is that our battles with other countries take place in cyberspace as often (more often?) than on muddy battlefields and in blue skies.

But we’re just talking about actual revenue and related earnings. If President Trump tweets as provocatively as candidate Trump did, valuations of defense stocks will get a boost, too. Potential beneficiaries of this dynamic, in my opinion, include Leidos Holdings (LDOS).

 

Loser: Coal

Wait, what? Coal? Wasn’t coal supposed to be a big winner in a Trump administration? In theory, yes. But the reality is more complex in my view.

First, let’s stipulate that the U.S. Environmental Protection Administration lowers whatever climate and emissions rules may have sidelined Appalachian coal miners. Now it’s just down to cost, right?

But the per-BTU cost of West Virginia coal is actually not much different than natural gas. It’s true that Wyoming coal from the Powder River basin is much less expensive, but it’s not as labor-intensive as Eastern coal from traditional coal mines. And Trump’s aim here, in my view, is to bolster employment, not darken the skies.

And anyway, the fuel cost is just one factor. It turns out that average total power plant operating expenses for coal or natural gas-fired plants are higher than for plants based on newer technologies like gas turbines, solar photovoltaic and wind generation.

And some of these technologies, like solar PV are likely to get even cheaper because they’re based on semiconductor technology, which has Moore’s Law working for it. So, in my opinion, coal is behind the eight-ball either way.

 

Winner: Security software

Whether or not you believe the Russians “hacked” the U.S. election, the debate itself has elevated the topic to front page status. Which in turn elevates the issue in corporate boardrooms in my opinion.

It seems likely that even the most passive corporate director will be asking, “Are we covered” in the next board meeting. Which means for even the savviest  chief information officer, budgets for security are, well, secure for the time being. And how much time will really go by until the next Yahoo hack?

You can invest in this dynamic via the PureFunds Cyber Security ETF (HACK), whose clever ticker neatly sums up the fund’s investment focus. Or you could invest in a single company that provides security across multiple platforms and threats.

Such as Check Point Software Technologies (CHKP), in my view. The Israeli company is coming off a very strong quarterly performance. Earnings estimates are going up, and Check Point is a consistent generator of free cash flow, which is used to fund growth via acquisitions.

 

Loser: Farms

Candidate Trump was adamant about building a wall along the Mexican border, deporting millions of illegal immigrants and threatening China over what he felt were unfair trade and tax policies.  

Unfortunately, President Trump will see that all three things are all negatives for U.S. farmers and other rural Americans, many of whom are his strongest supporters. I think there is reasonable certainty that there will be a net loss of migrant labor in the United States.

And farm labor is predominantly migrant labor. This means that farmers will likely compensate for higher labor costs by opting for more mechanization.

Tariffs on finished good imports from China will likely lead to retaliatory tariffs on our biggest exports to that country, like grain. This in turn will lower farm incomes and capital spending on tractors and combines.

It will also raise prices for all U.S. consumers. Perhaps this trade-off is worth it in the long run, if higher prices mean paychecks for U.S. citizens and legal immigrants, fewer of whom will be on public assistance.

It might even help counter the opioid epidemic sweeping rural America. And perhaps Trump isn’t quite as opposed to immigrant labor as his rhetoric suggests.

But I think that in the short run, the Trump administration’s tariff, trade and tax goals are an economic negative for Caterpillar (CAT), Deere (DE) and any other company serving or selling products in the farm economy.

Of course, Trump is renowned as a negotiator, and he may be starting off with an “aggressive” posture, only to eventually settle on some less aggressive (and costly) policies.

But then he did say America was going to win so much we’ll get sick of winning. All we really know is that for the next four years, life is going to be “tremendous.”

Photo Credit: Gage Skidmore via Flickr Creative Commons

Author profile

Barry Randall
Barry Randall
Crabtree Asset Management invests in growing technology companies. Barry Randall is the firm's founder and chief investment officer. He has more than 20 years of professional investing experience.

Barry spent five years as a technology stock analyst and 10 more years managing mutual funds that focused on small-cap and technology stocks. He has experience managing mutual funds and separately managed accounts as large as $650 million. Prior to earning his MBA in 1993, he spent six years as a professional computer programmer.

Barry earned a Wall Street Journal 'Category King' award for his co-management of a small cap mutual fund in 2006.

As of December 2016, Morningstar rated the Crabtree Multi-Cap Technology composite, of which the strategy offered at Covestor is a component, as having four stars (out of five) for its overall and trailing 5-year performance.

Barry has been quoted regularly in Forbes, US News & World Report, TheStreet.com and E-Commerce Times. He has appeared on CNBC, Bloomberg TV and Fox Business News.

Crabtree Asset Management LLC was founded in 2008 and is headquartered in Saint Paul, Minnesota.