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Published: January 28, 2010
President Obama has given his speech, the
Republicans have had their say and the punditry has opined and
moved on.
Investors should now consider what effect the State of the Union
address and the president's 2010 agenda might have on their
portfolios.
The speech's focus, jobs, may well be the right direction for
the administration to take, but it's a macro level approach.
Investors should instead seek micro-level opportunities that
will have a significant effect on individual public companies.
That means health care. I've long predicted that the president
wouldn't get his health care bill, and with the recent election
of Republican Scott Brown in Massachusetts, the future of the
current proposal looks bleak. In Washington, putting something
on the back burner -- as the president seemed to suggest last
night -- is the same as putting it on the shelf. While no one
can predict what will come out of the legislative process, which
is at best chaotic, the prospect of a "public option" -- that
is, a government-run health-care plan that would compete with
private insurance companies -- is dead.
The nation's two largest health insurers, WellPoint, Inc.
(NYSE: WLP) and UnitedHealth Group Inc. (NYSE: UNH),
remain undervalued. Both have been profitable throughout the
downturn, with WellPoint showing remarkable earnings resiliency.
Nevertheless, the legislative risk hanging over both these
companies has put a serious dent into their respective
valuations. WellPoint historically trades at 14 times earnings
and is selling for less than 11; UnitedHealth is trading at 10.4
times trailing earnings when it is generally worth at least
15.6. Given their earnings estimates for 2010 and assuming a
return to the historical average valuation as the legislative
threat officially abates, each company presents upside in excess
of the long-term S&P average: UnitedHealth +41.2% and WellPoint
+29.5%.
The other opportunity for investors was crammed into two
paragraphs in the middle of the speech that concerned energy.
Obama clicked off several areas he wanted to focus on.
The first is nuclear power. For a president whose political
acumen has been called into question in recent weeks, this is a
brilliant move. If Obama wants real change in environmental
policy, he's going to have to give Republicans what they want on
nuclear power. By suggesting a push in this direction, the
president nicely jujitsued the issue to his advantage and can
now claim credit for something he would have had to give away.
While there are only a few companies that can build a nuclear
power plant -- Shaw Group Inc., Fluor Corp., Bechtel -- these
projects are years from being approved and more years from being
built. There are great reasons to own Shaw and Fluor,
particularly for investors who want to benefit from government
action, but a sudden wave of nuclear power plants isn't going to
juice their bottom lines anytime soon.
The president next mentioned offshore drilling -- a sector that
seems fairly valued. However, the next area Obama touched on is
a segment investors should pay extremely close attention to:
advanced biofuels.
Biofuel has traditionally meant corn-based ethanol, but that's
changing. A Bush-era energy law called the Energy Policy and
Security Act of 2007 establishes federal production targets for
renewable biofuel -- that is, corn-based ethanol -- as well as
an aggressive timetable for the production of advanced biofuels,
which is defined as any fuel 50% cleaner than gasoline. But the
real money shot is cellulosic ethanol, demand for which will
rise +15,900% between now and 2022.
Cellulosic ethanol can be made from any plant using enzymes that
break down the cellulose in plant-cell walls and turn this sugar
into ethanol. The process can use any native plant material.
Verenium Corp. (Nasdaq: VRNM), a Florida-based biotech firm,
has been working on the technology for decades. (I alerted my
Government-Driven Investing readers to Verenium in
this issue.) The
approval of a key federal loan guarantee likely will serve as a
springboard for these shares, and commercial-scale production
plants will produce billions of gallons of ethanol and billions
of dollars in revenue. I predict the president will go to
Florida for the ground-breaking of this facility when it occurs,
and I'll be less than surprised if Verenium's match the
explosive growth in cellulosic output.
The last piece of the president's brief mention of energy was
clean coal. Clean coal is an especially compelling idea, as coal
fires roughly half the electric power plants in the country.
It's also cheap and abundant, with hundreds of years of
reserves. And it needn't be dirty: Scientists already know how
to burn coal without producing any emissions at all. The trick
is to burn coal with pure oxygen. The ambient air is mostly
nitrogen, and nitrogen throws a wrench into things because it
creates a lot of nasty byproducts that make separating the
various components of a utility's emissions very difficult. If
pure oxygen is used, the only byproduct is water vapor and
carbon dioxide, which is easy to separate. The water can be
piped off and the CO2 can be stored. Problem solved.
The leading company in this exciting space is the industrial gas
company Praxair Inc. (NYSE: PX), which holds hundreds of
patents related to the technology. (I alerted my
Government-Driven Investing readers to Praxair
in this issue.) Right now investors can buy one of the
world's largest industrial gas businesses and get the so-called
"oxyfuel" process for free.
Obama's focus on jobs is what most Americans expect of their
president in times of economic uncertainty. But it is his ideas
about health care and energy -- one because of what he has been
unable to do, one because of what he would like to do -- that
have the most potential for long-term, growth-oriented
investors.
-- Andy Obermueller
Chief Investment Strategist
Government-Driven Investing |
