Is it Too Late for a Trump Trade?

As we all know, the election is long over and Donald Trump has now been sworn in as the President. These events have had a significant impact on investors. The S&P 500 index is up more than 9% since the election and economists have been revising their forecasts of GDP growth higher in anticipation of policy changes Trump is expected to make.

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  • Companies are also considering the impact President Trump and his policies will have on their operations. Early indications are they believe the impact will be significant and largely positive. This is based on an analysis of comments company CEOs are making during their quarterly conference calls with analysts.

    Typical of those comments are the thoughts of FedEx’s CEO who recently said:

    “The bigger issue for all of you to look at longer term for us is the features that are in the GOP blueprint and President-elect Trump’s plans that we like a lot, and those include materially lowering the tax rate, the effective territorial treatment of foreign earnings, and current expensing of CapEx. We think that will positively impact our top line through stronger economic growth and, of course, the bottom line potentially in a very big way through the lower tax rate.”

    Of the S&P 500 companies that have reported since the election, 64% have commented on Trump’s expected policies. About 15% of the companies have commented that they expect changes in tax policy to benefit their clients or themselves. About the same number have commented favorably on the prospects of increased infrastructure spending. Others are expecting improvements in profits as the regulatory burden is eased. Overall, there seems to be a startling increase in optimism in a short amount of time.

    For investors, the question is whether or not there is still time to benefit from this optimism. Stocks have rallied significantly since the election with major market averages reaching new all-time highs while a number of technical indicators warn that the market is overbought.

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  • According to many analysts, overbought readings of indicators indicate prices have moved up a great deal in a relatively short amount of time. Some investors believe a pullback, or a decline in prices, is likely after indicators become overbought. That does happen sometimes but other times the overbought reading is associated with strength and indicates the up trend is just beginning.

    Right now, it looks like we could be at the beginning of a multiyear up trend. This view is based on the fact the S&P 500 index just broke out of a two-year trading range.

    A trading range can replace a bear market and allow the market to build up steam for the next up turn. In a bull market, prices could double and that means we could be in the early days of a market move investors will want to participate in.

    Despite the room for optimism, risks still exist in the current stock market. Keeping risk in mind, the most conservative buys could be stocks that are undervalued and could benefit from the next Trump bump. There are several stocks like this in the infrastructure sector.

    Chicago Bridge & Iron Company N.V. (NYSE: CBI) is a leading provider of technology and infrastructure for the energy industry. CBI provides conceptual design, technology, engineering, procurement, fabrication, modularization, construction, commissioning, maintenance, program management, and environmental services worldwide. The company operates in four segments: Engineering & Construction, Fabrication Services, Technology, and Capital Services.

    Analysts expect CBI to report earnings per share (EPS) of $4.53 in 2017. On average, companies in the construction services industry have traded with a price-to-earnings (P/E) ratio of 19.6. If CBI traded at an industry average P/E ratio, the stock would trade at about $89 a share.

    One factor weighing on the stock could be concerns related to the sale of its nuclear business several years ago. Toshiba is now struggling with that business and concerns seem to be related to the possibility the sale proceeds could be clawed back in a bankruptcy proceeding. For now, this seems unlikely and appears to be factored into the price. As these concerns ease, CBI could double in price.

    ArcelorMittal (MT) operates as an integrated steel and mining company worldwide. MT is a leading supplier of steel products in all major markets including automotive, construction, household appliances and packaging. MT is present in 60 countries and has an industrial footprint in 19 countries.

    Steel makers could be big winners under Trump’s policies. They could benefit from lower tax rates and from increased sales related to infrastructure projects.

    Analysts expect MT to report EPS of $0.75 this year. With a P/E ratio of 15, more than a quarter below the industry average, the stock could deliver a gain of more than 35%.

    U.S. Concrete, Inc. (Nasdaq: USCR) produces and sells ready-mixed concrete, aggregates, and concrete-related products and services for the construction industry in the United States. USCR operates through two segments, Ready-Mixed Concrete and Aggregate Products. The Ready-Mixed Concrete segment is involved in the formulation, preparation, and delivery of ready-mixed concrete to customers’ job sites; and the provision of various services that include the formulation of mixtures for specific design uses, on-site and lab-based product quality control, and customized delivery programs. The Aggregate Products segment offers crushed stone, sand, and gravel for use in commercial, industrial, and public works projects. USCR provides its products and services from its operating companies in North and West Texas, Northern California, New Jersey, New York, Washington, D.C. and Oklahoma.

    Analysts expect the company to report EPS of $3.80 this year and $5.17 next year. With a P/E ratio of 25, the industry average, USCR could be worth more than $95 a share, a potential increase of about 50% above the recent price.

    United Rentals, Inc. (NYSE: URI) operates as an equipment rental company. It operates in two segments, General Rentals; and Trench, Power, and Pump. The General Rentals segment engages in the rental of general construction and industrial equipment, such as backhoes, skid-steer loaders, forklifts, earthmoving equipment, and material handling equipment. The Trench, Power, and Pump segment is involved in the rental of specialty construction products, including trench safety equipment, such as trench shields, aluminum hydraulic shoring systems, slide rails, crossing plates, construction lasers, and line testing equipment for underground work; power and HVAC equipment. URI is the largest equipment rental company in the world with locations in 49 states and 10 Canadian provinces.

    URI could be a big winner in a Trump economy. Lower tax rates could boost earnings. The company could see sales increase as infrastructure spending rises. The company could also see revenue climb if other companies increase capital expenditures in response to changes in the tax code.

    Analysts expect URI to report EPS of $8.60 this year and $9.90 next year. Based on this year’s expected earnings, the stock could be worth more than $150 a share at its long-term average P/E ratio of 18, a potential gain of more than 30%.

    For now, earnings estimates don’t include the impact of potential policy changes. Each of these stocks is undervalued based in current estimates. If policy changes occur, estimates could rise and the stocks could soar as traders seek to benefit from the changes. Even without policy changes, these stocks could deliver large gains based on current expectations.

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