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Amid threats of swamp draining, boom times loom for lobby-heavy stocks

20 January 2017 in Trading Ideas

Key Takeaways:

  • Lobbying is an outstanding investment for companies with lots of government business
  • Health care companies with significant lobbying presences have reported large gains
  • Lobbyists are also likely to provide value in transportation, tech and financial sectors

Technically speaking, the nation’s capital was built on a tidal plain, rather than a swamp. The swamp metaphor, however, is appropriate. Lobbying in Washington has almost doubled since 2000, with spending rising to $3.1 billion last year.

President Donald Trump has promised to “drain the swamp” by curbing the influence of lobbyists in the capital. Barely a week after taking office, he signed off on policies that would ban White House officials from ever working as lobbyists for a foreign government. Still, lobbyists aren’t totally left out in the cold under the Trump administration. The new president also reversed an Obama-era order that prohibited lobbyists from joining agencies they had previously attempted to influence.

To some extent, the Trump actions – like other anti-corruption policies announced by new White House occupants — were political posturing. Even so, the new policies are important to investors in the companies that received shares of the $1.1 trillion in taxpayer-funded government contracts or grants that were awarded last year. Lobbying is a crucial business strategy for companies that rely upon revenue from taxpayers. According to one study, major government contractors received $1,171 in contracts for every $1 invested in lobbying and other political activity during 2014.

Affordable Care

Political battle lines have already been drawn over reproductive rights and immigration, but the biggest fight of all is likely to occur when the White House and Republican-controlled Congress scrap the Affordable Care Act, an Obama program that cut the number of Americans without health insurance by half.

Health care accounts for $1 of every $6 spent in the U.S. It’s highly likely that health insurers and providers will unleash a torrent of lobbying activity on Capitol Hill, rivaling even the $557 million spent by the health industry during the 2009 fight over the Affordable Care Act, which became popularly known as Obamacare.

The fight over any successor to Obamacare is likely to be critical for companies like Wellcare Health Plans (WCG), the Tampa-based insurer that’s a major player in both the Medicaid and Medicare programs. Shares in the company’s stock have almost doubled over the past year as Wellcare has been eyed as a possible takeover target by a larger insurer. Over the last two years, the company has spent $3.49 million lobbying lawmakers, primarily over bills that would affect mental health and elder care coverage.

Health care providers that have positioned themselves to benefit from an aging population while maintaining an active presence on K Street have also seen substantial gains. Shares in Select Medical Holdings Corp. (SEM), the Mechanicsburg, Penn.-based long-term and acute care provider, have shot up more than 50 percent during the last year. Select has spent more than $3 million over the last two years, primarily attempting to influence lawmakers considering issues related to Medicare, the government insurance program for the elderly and disabled.

Overnight Profits

Not all corporations have either the luxury of focusing on a single issue such as health care or having a guaranteed revenue stream from government contracts. FedEx Corp. (FDX), the Memphis-based delivery services giant, spent $12.5 million on lobbying in 2016. The company used more than a dozen K Street firms to influence lawmakers on 21 separate measures ranging from an aviation safety measure to a bill that would provide $138 million in funding for Dungeness and rock crab fishing businesses.

FedEx shares have risen 50 percent over the last year, boosted by a 10 percent increase during the holiday season that saw the company handle about 357.5 million packages. Company lobbyists, however, aren’t likely to enjoy a vacation. Fred Smith, FedEx’s chief executive, told Bloomberg that he was concerned that the Trump administration could curb international trade – and company profits – with its hardline position on the North American Free Trade Agreement (NAFTA) and allegations of Chinese currency manipulation. United Parcel Service (UPS), a FedEx competitor, has been almost as active on Capitol Hill. The Sandy Springs, Georgia, company spent almost $7.8 million on lobbying last year, retaining nine K Street firms to influence lawmakers considering 27 bills. Shares in UPS stock have risen nearly one-third over the last year.

Heavy lobbying expenditures also didn’t hurt Textron Inc. (TXT). Shares in the Providence, R.I.-based company have jumped almost 50 percent over the last year. Textron, a diversified aerospace company, spent almost $3.9 million on lobbyists last year; it received almost $1.3 billion in taxpayer-funded contracts.

Tech and Financials

Lobbyists are expected to be especially vital for tech companies, most of which opposed Trump’s presidential bid. Trump routinely sniped at Amazon (AMZN) founder Jeff Bezos, owner of the Washington Post, and Mark Zuckerberg, the Facebook (FB) chief executive who advocated for greater immigration.

So far, tech firms that employ lobbyists don’t seem to have suffered too much. Shares in Globalstar Inc. (GSAT), the satellite communications pioneer, have increased more than 10 percent over the last year. The Covington, La.-based company has spent modestly on lobbying – slightly less than $500,000 last year – but used half its lobbying budget to hire the BGR Group, an influential K Street firm whose principals include former Republican National Committee Chairman and Mississippi Gov. Haley Barbour, as well as former Clinton White House Counsel Lanny Griffith.

Meanwhile, Intuit (INTU), the tax software company, spent about $2.4 million to lobby on a baker’s dozen measures, mostly involving taxation, budget and small business issues. Its stock has shot up almost one-third over the past year, and Trump’s pledge to reform the nation’s Byzantine tax system likely won’t damage its prospects going forward.

Financial firms also are likely to be busy hiring lobbyists over the next year, as the new White House has vowed to “dismantle” the Dodd-Frank law that was passed in the wake of the 2008 collapse of the financial markets.

Depending on how the legislation is written, a Dodd-Frank repeal could be good news for financial services firms like Federated Investors (FII). Shares in the Pittsburgh-based company have risen about 15 percent over the last year. The company spent slightly more than $1.5 million on lobbying last year.

Motifs:

Kings of K Street Obamacare Repeal Obamacare Transporting America

 

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