(Bloomberg) — If Democrats and Republicans agree on anything before the presidential election, it’s that the U.S. needs more government spending. And the stocks poised to benefit most from that aren’t being properly valued, according to Goldman Sachs Group.
They’re companies that get more than 20 percent of sales from U.S. largesse, ranging from aerospace and defense stocks to managed-care providers and industrial manufacturers. They’ve beaten the S&P 500 Index so far this year yet remain cheaper than the broader market relative to earnings, signaling more room to climb, Goldman said.
Investors have struggled to find bargains in a stock market that’s seen valuations swell to levels not seen since the start of the bull market. While it would be a stretch to expect much policy overlap between Hillary Clinton and Donald Trump, Goldman has identified a handful of stocks insulated from partisanship that stand to gain no matter what the outcome.
“Increased government spending appears to be the most likely policy outcome from either a Clinton or Trump presidency,” Ben Snider, an equity strategist at Goldman Sachs Group, wrote in a client note last week. “Regardless of who wins, companies leveraged to fiscal expansion should benefit.”
With 99 percent of revenue coming from government spending, stocks like Lockheed Martin Corp. and Huntington Ingalls Industries should be of particular interest to investors following the election, said Goldman. So should health care companies including Centene Corp., WellCare Health Plans and Molina Healthcare, all of which get most or all of their sales from Uncle Sam, or programs run by Uncle Sam’s friends. Goldman’s basket contains 64 total stocks.
Despite beating the S&P 500 by more than 400 basis points so far this year, the group traded at a 9 percent discount to the benchmark on a price-earnings basis as of Friday, according to data compiled by Goldman. The S&P 500 rose 0.4 percent to 2,147.49 at 9:31 a.m. in New York.
The aerospace and defense industry, with 15 companies in the Goldman basket, is particularly undervalued. A corresponding index of stocks in the S&P 500 trades at 17 times profit, 15 percent below the broader benchmark’s valuation.
“Just given the state of the world, it could be a relatively attractive area, not just right after the election but for the next several years, no matter which party is in power,” said John Carey, a Boston-based fund manager at Pioneer Investment Management, which oversees about $230 billion. “It’s a good jobs provider as well, which could be helpful for the economy.”
Industrial and raw-material stocks are also poised to gain regardless of the election outcome, Goldman said. Clinton has proposed an investment of $275 billion over five years to improve U.S. infrastructure, including $25 billion in seed money to create a national bank for the initiative. While Trump has been less forthcoming with details about his own plan, he’s called Clinton’s proposition “not nearly enough,” suggesting his own intentions to spend big on public works.
While Goldman doesn’t see the increased spending kicking in immediately, the U.S. economy will get a boost down the road. After a stable 2017, government spending will rise by about 1.5 percent in 2018, when new budget deals go into effect, the firm forecast. That should, in turn, help corporate earnings growth and equity investors embrace risk, they said.
On a shorter-term basis, the S&P 500 will rise in the weeks following the election if history is any indication. For the 21 votes since 1932, the gauge has increased in the subsequent three months nearly two-thirds of the time by a median of 3 percent, according to data compiled by Goldman.
Still, not all post-election gains will be created equally. Based on their high historical correlations with Republican odds of winning, professional services firms, software companies and growth stocks should outperform if Trump takes office, according to Goldman. By similar logic, if Clinton is victorious, expect gains in textiles, apparel and luxury goods, health care providers and services firms, they said.
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