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Is The Post-Election Honeymoon Over?

February is among the unkindest winter months in the Northeast. When a nor’easter hits, the icy wind can feel like a slap across the face.

And yet in past years, despite the daunting cold during the Presidents’ Day holiday, I’ve typically seen quite a few American flags hanging over doorsteps. I’m also accustomed to seeing rows of small fluttering flags planted along the snow-banked roads of local towns.

Not so much this year, which makes me wonder if public sentiment and with it investor optimism are turning sour.

Perhaps it’s coincidental, but when measured by the robust “Not My Presidents’ Day” rallies this past weekend across the country, it seems fair to say President Trump’s brief honeymoon is over.

The forced resignation of National Security Advisor Michael Flynn, conflict with the courts over a travel ban, and a dearth of ideas to replace the Affordable Care Act are forcing investors to reconsider how quickly even the aggressive new president can implement change.

Although the S&P 500 and Dow Jones Industrial Average have continually reached new highs, faint cracks are starting to appear in investor exuberance. Among the universe of companies that I follow, I’ve heard from a handful about order delays late in the fourth quarter due to uncertainty over Trump’s fiscal policies.

Meanwhile, other industry groups that had been under pressure because of expectations that the Trump administration would impose heavy-handed regulation are now rising as this fear dissipates.

In both cases, stocks had been pushed too far based on little more than fear or hope. But as the post-election dust settles, the return to a rational center offers investors many great buying opportunities.

I’ve got a few stocks in the Profit Catalyst Portfolio that are on my “hope to buy soon” list, correlated to such industries as construction and drug manufacturing. While most investors dislike down days for the stock market, I’m happy to see some red on the names that I’ve been eager to buy at lower prices.

Many analysts say the market as a whole is overvalued and I agree that many stocks have run too far on froth. I’m waiting patiently for some to dip down into what I consider appealing buy zones and will be ready to pounce when they do.

The flip side is that certain sectors that had been decimated by unwarranted worries over new Trump policies are starting to pop. Notably, many biotech stocks took it on the chin last year because of Trump’s “populist” promises during the campaign to crack down on supposed drug price gouging.

However, it’s increasingly apparent that the Trump administration will adopt a hands-off policy toward many industries, including biopharmaceuticals. Two of my newest positions for Profit Catalyst Alert are in the drug industry and they’ve jumped almost 10% in just three weeks.

Conversely, many stocks whose run had been inflated by the rebuilding of America theme are pressing the pause button. Construction heavyweight MDU Resources Group (NYSE: MDU) noted a drop in backlogged orders for the most recent period and paving supplier Vulcan Materials (NYSE: VMC) pointed out a drop in demand in late December.

To be fair, supplying large construction projects has always been a lumpy business. Those that rely on government funding must deal with extra uncertainty, in the forms of red tape and budgetary vagaries. In addition, outdoor construction projects can be upended by severe weather, an unpredictable but significant risk.

That said, investors wading into the pharmaceutical group must be careful, too. Drug firms relying only on price increases versus higher usage of their drugs remain vulnerable. Big companies with blockbuster drugs that must contend with encroachment from generics also face pressure.

As always, I research every name carefully before inclusion in the Profit Catalyst Portfolio, to selectively pinpoint stocks with inherent strengths rather than blindly buying into a particular sector. I prefer to focus on the long-term fundamentals, rather than the fleeting passions of a honeymoon.

 


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