Every investor knows that politics and the financial markets go hand in hand, for better or for worse. Washington, D.C. and Wall Street are often at odds with one another, although they do sometimes agree, and the stock market reflects that. Investors are happy when both Washington and Wall Street are happy.
Just take a look at what happened at the turn of the New Year. As politicians in Washington began to compromise over spending and deficit reduction during the Fiscal Cliff negotiations, stocks inched higher day by day and then exploded the day after a deal was reached.
For long-term investors, opportunities could arise in the months ahead to buy blue-chip stocks that might dip temporarily if the financial markets overreact again to events transpiring in Washington, D.C. on matters that have a huge economic impact such as the Fiscal Cliff.
While the debate over the Fiscal Cliff, a series of $530 billion in tax increases and budget cuts at the federal level that went into effect Jan. 1, 2013 was resolved, there are more contentious issues on the way. Coming up soon is the need to raise the borrowing ceiling for the United States national debt, and budget sequestration, which entails $110 billion in mandatory cuts to federal programs. Both of those events are scheduled to take place on March 1, 2013. If those are not settled in a manner viewed favorably by investors, the United States credit rating could be downgraded again.
The Fiscal Cliff agreement that was reached at the last hour received a bullish reception, as the Dow Jones Industrial Average rose 308 points in trading the next day. But the market action before the resolution was very bearish. Many blue-chip stocks fell as investors feared that the United States economy would fall back into a recession due to the budget cuts and tax increases.
Based on the performance of stocks before and after the Fiscal Cliff settlement, those with strong global consumer franchises such Coca-Cola (NYSE: KO), McDonald's (NYSE: MCD), Teva Pharmaceuticals (NYSE: TEV) and JP Morgan (NYSE: JPM) could fall again due to the gridlock in the nation's capital. However, each has proven that it can also rise after the issue has been resolved, as the poor performance of the leadership in Washington, D.C. does not diminish the long-term appeal of these companies as investments.
As the charts below show, McDonald's, Coca-Cola, Teva Pharmaceuticals, and JP Morgan all fell before the Fiscal Cliff was to be crossed. From there, Wal-Mart, Coca-Cola, McDonald's and other stocks rallied as the Dow Jones Industrial Average rose by 308 points in trading after the Fiscal Cliff agreement was reached.
In this first chart, both McDonald's and Coca-Cola, decline as the Fiscal Cliff approaches. After an agreement was reached in late December, both rally into the New Year.
McDonalds (MCD, Red & Green) & Coca-Cola (KO, Black and White):
Chart Courtesy of MetaStock Professional
For Teva Pharmaceuticals and JP Morgan, the chart below tells the same story for market action in late 2012 and early 2013.
JPMorgan Chase (JPM, Red & Green) & Teva Pharm (TEVA, Black & White):
Chart Courtesy of MetaStock Professional
The primary reason that each of these stocks plunged is the main factor for McDonald's, Coca-Cola, JP Morgan, and Teva Pharmaceuticals being such a compelling long-term buy. All sell to consumers around the world. If a recession hit, there would be a decline in revenues. But all rebounded as these companies are industry leaders with a global franchise that is protected by a broad economic moat, which are the factors such as brand name, advanced technology or regulatory standards that protect the business operations from competition:
*Coca-Cola is one of the most famous brands in the world. Its products are sold in every country except for North Korea and Cuba. Coca-Cola is the largest global beverage company on Earth and has been in business since 1886, now selling more than 500 product brands in over 200 countries.
About the economic moat of Coca-Cola, legendary investor Warren Buffett once observed that, "If you gave me $100 billion and said, ‘Take away the soft-drink leadership of Coca-Cola in the world,' I'd give it back to you and say it can't be done."
*Widely considered to be one of the best managed banks, JP Morgan Chase (NYSE: JPM) is also the largest in the United States with over $2 trillion in assets. The robust consumer banking of JP Morgan in mortgage activities and credit card operations around the world creates a very wide economic moat. Overall, JP Morgan has operations in more than 60 countries.
*The golden arches of McDonalds announce its presence to consumers in about 120 nations. While the basic menu of McDonald's is the same, it has been adapted for different tastes in different countries. In Asia, for example, McDonald's sells a Samuri Pork Burger and McRice, among other items crafted to please the indigenous palette. No matter which item is served by McDonald's in whatever country, the quality of the product is an important consideration and a huge part of its economic moat.
So critical is quality to the McDonald's brand that it created Hamburger University where their managers are trained in the McDonald philosophy and way of doing business.
*Teva Pharmaceuticals is the largest generic drug company in the world. Based in Israel, Teva has a global presence that has contributed to very strong sales and earnings-per-share growth over the last 5 years, easily topping those for Merck (NYSE: MRK), Eli Lilly (NYSE: LLY), AstraZenaca (NYSE: AZN) and Bristol Myers Squibb (NYSE: BMY). This should continue as Teva Pharmaceuticals has an economic moat featuring 27 pharmaceutical products in late-stage development.
As the table below shows, McDonald's, Coca-Cola, JP Morgan, and Teva Pharmaceuticals are all more profitable then industry peers with strong profit growth rates.
|Net Profit Margin Trailing Twelve Months||19.80%
|5-Year Net Profit Margin Growth||18.10%
*industry average is in parenthesis.
In addition to being more profitable, these companies also have a strong dividend framework. As legendary investor Jack Bogle, founder of the Vanguard group of mutual funds and creator of the first index fund, notes in his book, Enough, that more than 40% of the historic total return of a stock has emanated from the dividend income component. For long-term investors, the dividend growth rate is important, as the income paid from these companies has a history of rising over time.
|Metric||McDonald's||Coca-Cola||JP Morgan||Teva Pharmaceuticals|
|5-Year Dividend Growth Rate||15.36%
No matter what happens in Washington, D.C., global demographics are bullish for McDonald's, Coca-Cola, Teva Pharmaceuticals, and JP Morgan. According to studies by McKinsey & Co., the global consulting firm, the world's consumer class is expected to expand to four billion by 2025, up from one billion in 1990. Consumer spending in emerging market nations is projected to reach $30 trillion by 2025, half of the world total. The market share for generic drugs is expected to increase by half by 2015, with 80% of the spending for pharmaceuticals in emerging markets going for the cheaper, but just as effective, alternative to brand-name meds.
No matter how the financial markets respond to the actions (or inactions) of Congress and The White House, the long term outlook for McDonald's, JP Morgan, Coca-Cola, and Teva Pharmaceuticals is too bullish for investors to ignore, particularly when shares sell at a discount due to a short-term overreaction to political follies. In summary, we are not suggesting that these stocks, or firms like them, are necessarily a good buy now. Instead, we would look for last year's pattern to emerge again when stocks sell-off prior to the upcoming "fiscal cliff/debt ceiling" uncertainty. Buying at the dips could turn into the kinds of profits we saw this year and a great entry point for a longer term hold.
Even in this uncertain investing landscape, you can count on Washington politicians to wait until the very last minute to come to any kind of agreement on the upcoming debt ceiling debate. This will afford stocks plenty of time to falter before a deal is reached, giving us a natural entry point into discounted stocks that might have otherwise been out of the question for investors. Keep a look out for a dip in the prices of industry giants such as McDonald's, JP Morgan, Coca-Cola and Teva Pharmaceuticals, as a lack of effective leadership in Washington, D.C. could mean big profits for you.
Have a great day trading.
Editor, SlingShot Trader