I’ve gotten a lot of questions from readers lately about the midterm elections – and how to position their portfolios for various outcomes.
I have some thoughts on the subject. I also have three stocks that I expect to do especially well after the November elections.
I’ll reveal their names and my rationale for buying them in just a moment.
Let me say upfront that I’m not a pundit.
I don’t let my political views drive my investment decisions. You shouldn’t either.
History shows that the market has done well when the Democrats have held the House, the Senate and the White House… when the Republicans have held the House, the Senate and the White House… and when we have had a divided government as well.
Of course, the market has also performed poorly in each of these scenarios.
Yes, some sectors will do better under the tax cuts and deregulation that Republicans favor.
And other companies will do better under the increased social spending and climate change policies that Democrats favor.
With next month's elections, however, there are only two possible outcomes.
Either Democrats maintain control in Washington… or Republicans break their lock on power and disrupt the Democrats’ agenda by winning the House, the Senate or both.
Some analysts suggest that you position your portfolio for one outcome or the other.
But I recommend that you position your portfolio to profit either way.
How? By focusing on those rare goals that Republicans and Democrats share.
Here are my top three:
- National defense
- Improved infrastructure
- Increased government efficiency.
And here, in my view, are the three best ways to play them…
No. 1: Raytheon Technologies (NYSE: RTX)
Russia’s invasion of Ukraine has reminded the world that if you don’t have a secure defense, everything you value is at risk.
Nations around the globe are now strengthening their defense capabilities amid rising geopolitical tensions. Arms and ammunition that feature next-generation warfare capabilities have proved essential in turning the tide in favor of Ukraine.
That is creating intense demand for Raytheon’s air and missile defense systems, auxiliary power units, surveillance and reconnaissance systems, land- and sea-based radars, jet engines, undersea sensors, and intelligence systems.
By creating smarter defense systems – and giving the U.S. military and our allies every advantage for operational success – Raytheon helps create a more secure world. Earnings are growing at a 27% annual rate.
No. 2: American Water Works (NYSE: AWK)
This company is the nation’s largest publicly traded water utility, providing high-quality water and wastewater services to more than 14 million people in 24 states.
It oversees a mind-boggling network of 76 dams, 1,700 pumping stations, 480 treatment plants and 1,300 water storage facilities, plus 49,000 miles of water mains and collection pipes.
The average water pipe replacement cycle in the U.S. is more than 100 years. But these pipes frequently leak or break as a result of the ground settling or shifting. The American Society of Civil Engineers reports that roughly 240,000 water main breaks occur in the U.S. annually.
Every pipe needs to be replaced eventually. The cost in the coming decade alone could exceed $1 trillion.
This challenge means American Water Works will have all the work it can handle for many years to come.
No. 3: Tyler Technologies (NYSE: TYL)
Tyler Technologies sells and supports software services that make it easier for local governments to manage their complex day-to-day business functions, including financial management, court cases, property taxes, citizen services, recordkeeping, document management, public safety and education.
The company’s offerings include enterprise resource planning – everything from payroll processing to electronic records management – as well as systems and software that automate scheduling and activities.
Tyler’s broad portfolio helps local governments operate more effectively and cost-efficiently. Public sector software is the firm’s specialty. That isn’t just what it does. That’s all it does. This focus and commitment have made it the national leader with cities, counties, states and school districts.
Tyler’s client base now includes more than 13,000 local governments across all 50 states, as well as in Canada, Great Britain and the Caribbean.
There is huge pent-up demand here. Many local governments haven’t upgraded their aging software management systems since the late 1990s. They are now.
And, overwhelmingly, they are turning to Tyler. No competitor has systems that are faster, more comprehensive or easier to integrate. Earnings are up almost 57% year over year.
Bottom line: All of these companies are profitable. All of them are growing. All of them are recession-resistant. All of them should perform well no matter which party fares best next month.
And, despite these many advantages, all of them are well off their 52-week highs.
My advice? Take advantage of the bear market and pick all three of them up now… while they’re still undervalued.