3 Blue Chip Stocks to Buy If Jeb Bush Becomes President and Delivers 4% Growth
Let's say Jeb wins the election. Let's also say he's got a sympathetic Congress to work with, one that can be corralled into passing the sweeping tax reforms that the Republican establishment has put at the center of their candidates' economic platforms. Finally, let's assume a relatively crisis-free four years for Jeb's new administration: no new wars, no mega-scandals, no new phases of the economic cycle preceded by "The Great."
Under these not-entirely-implausible circumstances, which companies will prove to be good bets for investors? If you trust Jeb's rally cry of 4% annual GDP growth -- which many critics scoff at since it's almost double the current GDP growth rate -- you're going to want to go long on the major manufacturing and heavy industrial cyclicals. This is where the Jeb economy is going to shine -- if everything goes according to plan.
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Companies like aluminum producer Alcoa (AA) - Get Report , which has been sliding since Nov. 2014 on a slower-than-expected economic recovery and a China-fueled global supply glut of its principal commodity, could see ideal conditions for a slow and steady uptick in stock price.
"Aluminum consumption tracks global economic growth very closely," Andrew Lane, analyst at Chicago-based Morningstar, said in an interview. "For all of the short-term, company-specific factors we can talk about, what's more important is the global macroeconomic outlook."
While the U.S. economy is a central component of that outlook, most of it is beyond the influence of any president -- especially when it comes to flagging Chinese demand for commodities, an issue that has thwarted the likes of big oil, heavy industry and raw materials over the past year. Presidents can, however, pressure China on their currency controls and the famously undervalued renminbi in order to decrease the country's mercantilist dependence on cheap exports. Jeb did some tough talking on China this fall.
"We're looking at a $17 fair value price," Lane said of Alcoa, which is currently trading around $9, "because we're taking a long-term view. We think the upstream value in the business is underappreciated and that Alcoa's going to be on the rise through the end of the decade."
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Look for GE (GE) - Get Report to do well under Jeb, too. It's another definitively cyclical stock, performing well when the market as a whole performs well. But there's another reason GE might benefit from a Jeb presidency: Jeb's business ties with China.
GE did more than $10 billion in revenue in China last year and is continuing to "realize synergies" in China's emerging markets. Jeb's private equity firm BH Logistics, meanwhile, has received tens of millions of dollars from some notable Chinese investors.
Chen Feng, one of China's wealthiest citizens, reportedly made a sizable investment in BH Logistics through his own private equity fund HNA Group, which Jeb then invested in Marshall Islands-based gas shipping company Dorian LPG. Feng has connections to George Soros, as well. These sorts of sophisticated investing networks could lead to increased economic cooperation between the U.S. and China and new contracts for well-positioned companies like GE.
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A third Jeb-friendly company that will be unshackled by a better-performing economy is the intensely cyclical Caterpillar (CAT) - Get Report , which has also been slumping since Nov. 2014 for many of the same factors holding down Alcoa, though Caterpillar shares are up near $10 from a September low of $63.79. More than 50% of Caterpillar sales come from overseas, so the balance sheet of the industrial equipment manufacturer is widely regarded as a barometer for the global economy.
"This is a company that's facing reality and recognizing a new normal," Eli Lustgarten of Longbow Research said in an interview. "We've seen a cyclical downturn of markets requiring stabilization, so from the base level of 2016 you'll see some improvement from 2017 to 2020." Increased GDP growth during this natural upturn in Cat's cycle will likely translate into even more impressive earnings for the company, especially if the source of that growth is infrastructure investment.
"Caterpillar is infrastructure by definition," Lustgarten said.
The Jeb tax plan will cut the corporate tax down to 20% from 35%, where it is now, and reduce the number of individual tax brackets to three from seven, with the highest paying 28%. The thinking is that the lower taxes will allow companies and wealthy individuals to keep, spend and reinvest more of their own money, boosting profits and, by extension, GDP. While this equation has long been a hallmark of Republican tax policy, economists -- and the presidents who lead them -- are famously bad at predicting growth. In other words, take Jeb's 4% call-to-arms with a shaker of salt.
"I think it's ridiculous when candidates throw around growth prediction numbers -- nobody knows what's going to happen," said Chris Edwards, an economist at the Cato Institute. "But generally speaking, we can expect the tax reforms being batted around now by Republicans to produce a 10% larger economy 10 years from now."
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