Economic Forces, More Than Politics, Drive Stock Prices
Posted: November 29, 2016
Before the bitterly-fought Nov. 8 presidential election, pundits were full of talk about which stocks would benefit most if Donald Trump won, or if Hillary Clinton did.
Guess what? The biggest movers since the big upset vote aren’t necessarily “Trump stocks,” And the biggest losers aren’t “Hillary stocks” either.
Since the election, a few stocks have roared like tigers while some others have flopped like limp fish. But rarely was politics the driving force.
NVIDIA
Nvidia Corp. (NVDA), of Santa Clara, Calif., surged almost 33 percent in the 13 trading days following Trump’s upset victory.
The company could hardly be better positioned. It makes specialized computer chips used in mobile devices such as smartphones. More and more consumers, especially younger ones, run their lives off these devices.
Nvidia’s latest results show it. Profits increased to nearly $1.2 billion in the past four quarters, compared to $614 million in the fiscal year that ended in January 2016.
The merits of the stock are now well recognized, however. It sells for 48 times recent earnings, eight times revenue and nine times book value. It is priced for perfection. I recommend taking some profits here.
FREEPORT-MCMORAN
Up 32 percent in the same 13 trading days was Freeport-McMoRan Inc. (FCX) of Phoenix. The world’s largest copper miner, Freeport-McMoRan also mines gold and drills for oil.
Here the Trump victory did play some role. Commodity producers in general have done well since “The Donald” upset pollsters’ applecart. Investors figure that Trump will go for tax cuts, stimulating the economy and reviving inflation. That would mean higher prices for copper and oil.
But much of Freeport’s climb happened for reasons unrelated to politics. The company announced it had reached some of its goals for reducing debt. To do so, it raised about $1.5 billion in a stock offering and sold off some $7 billion in assets (including oil deposits in the Gulf of Mexico).
HARMAN INTERNATIONAL
Harman International Industries Inc. (HAR) was up 29 percent in the 13-day period on takeover news. It agreed to be acquired by Samsung of South Korea for $8 billion.
It’s too late to ride this move now, but it’s not hard to see why Sansung was interested. Long a leader in car audio systems, Harman has been branching into electronic controls for cars, probably a hot area for the next several years.
TRIP ADVISOR
Switching to the stocks that have fallen the most since the election, Trip-Advisor Inc. (TRIP) stands out, down 19 percent.
As its name implies, TripAdvisor operates a travel-information website. Its revenue grew at better than a 22 percent clip the past five years, but growth came to an abrupt half in the past 12 months.
My view is that the site doesn’t have enough unique proprietary content. It offers reviews of hotels, restaurants and attractions, all generated by the site’s users.
Call me elitist, but I’m not convinced that reviews by “regular people” are better than reviews by experts – even self-appointed experts. I feel that way with regard to reviews of hotels, restaurants, movies and pretty much everything else.
PATTERSON
Patterson Companies Inc. (PDCO) fell 16 percent in the period. The St. Paul company distributes dental supplies and veterinary supplies. Its profitability, quite strong in the early 2000s, has gradually diminished to middle-of-the-road.
Patterson’s quarterly earnings came in light, the company’s guidance on future earnings was subdued, and investors were left wondering whether or not Patterson would strike up a distribution deal with Amazon.com. So far as I can see, politics has zero effect.
TYSON FOODS
A bad quarterly earnings report was also the culprit for a 15 percent drop in shares of Tyson Foods Inc. (TSN). On Nov. 21, the company, the world’s largest processor of beef, pork and chicken, said third-quarter earnings came in at 96 cents a share.
That was above the previous year’s figure but well below the $1.17 per share that analysts expected.
ECONOMICS TRUMPS POLITICS
To be sure, Trump’s election as president influences the market. Construction stocks, industrial stocks and bank stocks have all been strong in the wake of Trump’s win, in large part on hopes of lower taxes and less regulation.
Still, as the examples above tend to show, other factors in the market often overpower political ones. I would say that politics is at most the fifth most powerful influence, after economic strength, profits, interest rates and the level of stock prices relative to underlying measures of value.
Disclosure: Some of my family members own Nvidia shares.