Tuesday, September 30, 2014

Stock Talk - 3

President Obama doesn’t like Wall Street. That much is clear from his comments about “fat cats,” “homes in the Hamptons,” and the like. That much is clear and permissible. He was elected President by a majority of voters in 2008 and reelected in 2012. But you should be aware of the fact when you are investing.  He and his Administration think (correctly) that big companies spend a lot of time and talent trying to minimize their tax bite, and he and his associates especially hate the practice of “inversion,” in which a U.S. company merges with a foreign company and reincorporates in the more tax-friendly nation, which is never the U.S.  But they’re not the only targets. Financial institutions have been repeatedly fined for various transgressions, and the fines can be huge.

That being so, you have to ask yourself, when investing, “Do I really want to bet my money against the President of the United States?” The question doesn’t just involve financial institutions. The prevailing attitude in the political world is that small businesses are good and big business is bad. In this political season, how often do you hear candidates taking that line?

(The other day President Obama, explaining the quick rise of ISIS in Iraq, said that the U.S. had given Prime Minister Al-Maliki a functioning government, but that Maliki was too intent on building up his political base among Shiites and thus squandered his legacy, As I read this, I thought the same might be said of President Obama, who was too concerned with strengthening his base among Democrats and thus contributed to the divisive climate that characterizes Washington.)

Although the odds are that President Obama will lose the Senate in November, the divisiveness will probable continue through 2016. Question: How does one tailor his stock portfolio given this situation?

Favor medium-size companies. Big companies like Wal-Mart and Amazon are inviting targets for politicians, and small companies (those with annual sales of less than $1 billion) are too vulnerable to economic crosswinds. The ideal company is one with sales of a few billion and in a business that is out of the headlines. A dividend is a plus but not essential. 

International exposure used to be a plus. No more.  The geopolitical situation is volatile, and companies that are seen as surrogates for Uncle Sam are probably going to attract unfriendly attention.

There are many sizable, profitable, growing, U.S.-based companies that are worth considering. Many of them are companies you probably have never heard of.  I’ll give you some hints in future blog posts.