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Bruce Frey's Analyst Insights

InvestorsObserver
Options Analyst Writer
Bruce E. Frey II
Author Bio


October 15, 2012 - Renewable Profits with an Obama Victory

We are just three weeks away from the Presidential elections and investors everywhere are trying to position their portfolios to boost their post-election returns. Following debates between the Presidential and Vice Presidential nominees, differences between the two camps appear more pronounced than ever. With the variations in such bright light, you would think choosing which stocks would benefit from either side winning would be easy. But the market is never that easy, breaking those who think they have cracked the code, with great regularity.

There are some stocks, in the technology sector for instance, who will benefit from an Obama win while there are other stocks in the same sector which could benefit from a Romney presidency. It is not as simple as saying this company got off the ground with government aid so the candidate who supports that aid is best for the company. The company could be at the point in its growth where it needs market conditions to change more than it needs aid.

Picking stocks based on the outcome of an election is problematic at best. And assumptions about which party will be better for which stock can be very tricky indeed. There have been many studies about which party is better for the stock market. Over the last fifty years or so (not a huge sample, I know), stocks have performed better under democratic administrations. The best performance, however, has been associated with strong factors outside the government's direct control.

There are, however, some areas where a clean advantage exists. If President Obama wins the election, his healthcare plan will be here to stay. While the bill would give a boost to the broader healthcare sector, major hospital operators will see a significant decrease in uninsured patients. Those who would currently seek treatment at hospitals without any health insurance would be covered, greatly reducing the volume of uncollectable fees.

China is an area where both Obama and Romney agree major changes need to be made. However, they differ greatly on how to crack down on China and its trade policies. Worries are growing that Romney would be too aggressive, and could launch a trade war against the second largest economy. Businesses are concerned that Romney, who has attacked China for manipulating the value of its currency, could impose trade sanctions. That would raise the cost of goods U.S. companies import from China and also limit their growth opportunities.

Renewable energy is another area with stark differences between the two candidates. President Obama has promised to extend current tax credits to providers of renewable energy, such as those operating wind farms and solar fields. Romney has said he would let those tax breaks expire. The President's support of renewable energy companies, however, doesn't mean every one of them is going to become wildly profitable. Remember Solyndra? Despite a $535 million loan guaranteed by taxpayer-provided funds, the solar panel maker went under and defaulted on the loan. Looking for renewable energy businesses that are already proven and profitable is a more reasoned approach.

An examination of alternative energy reveals several companies whose operations deal in the arenas of wind, solar, geothermal and nuclear power. Though primarily an electric utility holding company, Exelon (EXC) qualifies for green energy credits because it provides about twenty percent of the country's nuclear energy. The stock took a huge hit in the wake of the recession and Japan's nuclear disaster, falling from a five-year high of $90.55 to current levels. While earnings have also slipped a bit the past two years, they remain strong and are more than enough to cover the annual dividend of $2.10 a share, which equates to a healthy yield of 5.8% at current prices.

Another company to look at, and one with a much nicer-looking chart, is NextEra Energy (NEE). NextEra is the country's biggest producer of wind and solar power and generated profits of $607 million or $1.45 per share in the second quarter of this year and expects to post a profit for the year of $4.54 per share on revenue of $15.44 billion. As you can see, this is not what most investors think of when they look for renewable energy stocks.

NextEra is involved in the generation of renewable energy from wind and solar projects but also generates electricity through natural gas, nuclear, oil and coal, and hydro power plants. The company is comprised of two strong businesses: Florida Power & Light, a regulated and vertically integrated utility; and NextEra Energy Resources, a wholesale generator of electricity primarily in the U.S., but also in Canada. With operations in both the regulated and unregulated sides of the sector, the company is positioned to take advantage of opportunities across a broad spectrum of the industry.

Truth be told, the company has the potential to perform well no matter who wins in November, but has certain positives going for it on the Obama side of the ballot. Investors considering a hedged trade on NextEra may want to look at the January 65/62.50 bull-put credit spread. In this trade you would sell the January 65 put while buying the same number of January 62.50 puts for a 25 cent credit or better. That works out to be an 11.1% return in less than 100 days (42.2% annualized, for comparison purposes only). Should the election go the other way, the stock has to fall 7% to cause a problem.

Be certain you fully understand the risk and reward profile of a trade before you put your hard-earned cash to work. If you have comments, concerns, praises or criticisms, please e-mail me at bfrey@InvestorsObserver.com.

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