With the stock market continuing to make new highs, it feels almost irresponsible for me to talk about things to buy without at least waiting for a pullback. Therefore, I think it makes sense to talk about what to sell.
One of the defining characteristics of the Trump administration will be “draining the swamp.” That means a lot of things to a lot of people, but as it relates to stocks, it means that if a company relies on subsidies, rebates, regulations and government meddling in the free market in order to succeed, you need to think very clearly about how a more honest government would impact your company. We’ve already seen how companies that are doing business directly with the US government have been warned to cut costs. Air Force One shouldn’t cost $4 billion. That’s silly. Profit margins for all companies doing business with the US Government are bound to drop. Some of this is priced in—a lot of it isn’t yet. However, many of these situations are obvious to investors already. They know that change is under foot and are watching closely. I’d like to talk about what I call “Lobbyist Stocks” and how the changes coming aren’t as obvious to investors yet. These are the stocks that need lobbying in order to succeed—or at least to earn excess profits beyond what the free market would give them. Here are a few examples;
-All of us pay taxes. At a certain level, we realize that they’re the price of civilization. In return you get roads, bridges and hospitals. While I think the system is being abused, I am willing to accept that some limited wealth should get transferred to those less fortunate. However, why should $7,500 of tax credits be allocated to a rich guy buying a $100,000 Tesla (TSLA)? Does that make sense to anyone? How does that benefit America? How would an elimination of this subsidy impact Tesla?Tesla is my favorite short—if I shorted—for many reasons. The potential elimination of this tax credit is yet another reason to believe it’s a zero. Will this rebate exist after the swamp is drained?
-I love getting packages from Amazon (AMZN), but the only reason that Amazon is competitive with Walmart (WMT) is that Amazon gets a massive government subsidy. You see, the post office makes money on delivering envelopes and those stupid advertising inserts that clog up your mailbox, but the post office loses globs on delivering packages. If the USPS priced package delivery at a level that guaranteed a break-even result, it would cost Amazon about $5 billion more. If the post office actually tried to earn a profit at it, Amazon would truly bleed money. It’s not like Amazon can turn to someone else to deliver its packages in less densely populated areas—that’s the reason that the USPS is delivering them in the first place. Is it any wonder that Bezos bought the Washington Post to be his soapbox? Is it any wonder he cozied up to the Democrats as blatantly as he did during the election? Imagine if each delivery cost $10 more—would you still order from Amazon?
-Murphy USA (MUSA) operates gas stations. You’d think that the business involves selling gasoline, soda and potato chips, but that’s not all there is to the business. In 2015, 53% of EBIT came from RINs. What the hell are RINs? Renewable Identification Numbers are funny credits the government gives you for selling fuel that is mixed with biofuels. Gas stations get them, but refiners don’t—unless they own or are partnered with gas stations. This law favors integrated refiners and blenders while penalizing non-integrated refiners. Carl Icahn has been complaining about the stupidity of this law for years and he certainly has Trump’s ear. Will RINs exist in a year? Is a normalized EBIT without RINs priced yet into MUR’s share price?
I can go on and on. My smart friends have told me of dozens of examples like this. I don’t short, but I don’t blame them for shorting these stocks. I am not saying that these companies did anything wrong, they simply set out to maximize their profits within a rather corrupt government system. Some of them weren’t even the ones paying for the lobbyists, they just took advantage of existing lobbying efforts. I anticipate that Trump will at least partly “drain the swamp” and some of these “lobbyist stocks” will be penalized. The question is–which ones? With the market making new highs each day, my advice is to go through what you own and figure out which ones need lobbying to survive—if it needs lobbying, be weary. Fortunately, new highs are a great time to sell companies that you might not want for the long-term.
Positions Mentioned: none