Four years ago, few thought Donald Trump was going to win the Presidential election (including me). But if he did, it was clear what companies would benefit. Energy stocks, steel, and US based manufacturing would be great investments as government policies and a Trump administration would be great for business.
This kind of thought process and bet is incredibly seductive, but it is not a good bet. Why is making investment decisions based upon an election prediction such a bad idea? Well, because you are actually making two predictions. The first is that you are predicting the outcome of an election. And the second is that you will be predicting who will be the winners after the outcome of that election. To nail both of those predictions seems really hard.
I’ve heard the following during the last week:
1. I think Trump will win and therefore you should buy this.
2. I’ve gone to cash as I’m worried the market will crash due to election uncertainty.
3. I’m not making any decisions until mid-November when the dust settles.
Consider that when Trump won, energy stocks initially popped up on the sentiment that a Trump victory would benefit the sector. Energy stocks surged about 10% in the first month post-election and then never really eclipsed that high price. Check out the ETF for energy stocks (NYSE: XLE). It is down over 50% from that peak about a month after the 2016 election. But that really doesn’t describe the devastation in the more levered energy companies. More than 231 energy companies have gone bankrupt since 2016.
In hindsight, lax rules and regulations and abundant capital in commodity businesses lead to more supply, not less. Drillers drilled with abandon and energy prices collapsed with so much supply. And COVID just accelerated the problem as you can see from the chart, energy stocks were falling well before the virus struck.
What has performed well during the Trump administration? Again, in hindsight, companies that had big growth trajectories in a low interest rate, slow growth environment. An accommodative Federal Reserve, lax enforcement from the SEC and antitrust officials has led top technology firms to surge ahead. I’m not sure anyone was predicting that Amazon would be a $1.5 trillion company after Trump won the Presidency. Surely, Trump would have been bad for Jeff Bezos who owns the Washington Post.
My hope in writing this post is that it helps me make better investment decisions and maybe helps you as well. I am trying to make decisions independent of what I think may happen in the election. This is where valuation and future prospects help. I want to explore two examples of how I’m currently thinking.
I’m bullish on cannabis as I have written before. My main investment is AYR Strategies (Canada: AYR, OTC: AYRSF). How could AYR be affected by the results of the election? If the Democrats sweep, it should be very positive for AYR, but even if they don’t or Trump returns to power with a Republican senate, the trend of American approval for cannabis, usage and acceptance are very clear trends that are unlikely to reverse. And further, AYR trades at five times my estimate of next year’s cash flow. My belief is that regardless of what happens, AYR should do well. This is specifically part of my investment process, looking for stocks with low downside, but uncertain upside.
Another example is that I’m bullish on natural gas. I don’t think that we are producing enough of it thanks to the collapse in drilling and the tough times surrounding the entire the energy sector. I’m very bullish on Black Stone Minerals (NYSE: BSM). How will election results affect Black Stone? If the Democrats win, they will probably increase regulation and make drilling harder. But ironically, that may be good for energy prices and the last men standing in the energy sector. But what I do know is that Black Stone has a very conservative balance sheet with a 9.6% yield and is down 70% from its highs. I get paid to wait with a very low valuation for great mineral assets.
So, here is my election investment advice. Don’t invest based upon election predictions. The future is a lot more uncertain than any of us understand. Who could have predicted COVID and the subsequent massive rally from April to now? 2020 is a giant example of just how uncertain the future is and how useless macro predictions can be.
Do your research, know your companies and try to be a long-term investor. And please, go vote.