How Obama Gave 2 Stocks A Huge Potential Catalyst
Despite strong resistance from the Republican party, President Obama has been surprisingly adroit in moving his agenda through the legislative process. From healthcare to environmental policy, the President has crafted his legacy over the last six years.
#-ad_banner-#For adept investors that were able to stay ahead of policy, profitable opportunities have abounded. For example, David Goodboy cited Centene Corp. (NYSE: CNC) as a key beneficiary of Obamacare in July 2012, and shares went on to surge more than 250%.
That same month, Nathan Slaughter highlighted Alcoa, Inc. (NYSE: AA) as a rebound story on Obama’s Corporate Average Fuel Economy (CAFE) standards, suggesting it would have a major impact on demand for aluminum. Shares of the metal giant have beaten the S&P 500 by 35% since that article first appeared.
If you were paying attention when the President gave his State of the Union Address last week, then you might have caught another stock tip from the Commander-in-Chief.
In fact, of the proposals the President laid out in his address, I think this stands the best chance at bipartisan support.
And it could throw a lifeline to one struggling industry.
From The Environmental To The Education President
President Obama had already announced his plan to pay for two years of community college students in a January 9 speech, but hit on it again in the State of the Union address. The costs would be borne by a state-federal partnership estimated at $60 billion to the federal budget and $20 billion to state budgets over ten years. The Administration estimates that nine million students would be eligible and would save an average of $3,800 per year.
Free education for nine million students couldn’t come at a better time with U.S. high school graduation rates, a leading indicator to college enrollment, topping 80% for the first time in history in 2012. The national graduation rate has increased an average of 1.3% annually since 2006 and is on-track to meet the 90% goal set by the America’s Promise Alliance for 2020. Enrollment in higher education is also increasing with nearly 40% of the 20- to 24-year old population enrolled in post-secondary education as of 2011, up from 35% in 2006.
More students mean more textbooks, something the struggling publishing industry sorely needs right now. After rebounding at the end of the financial crisis, the Dow Jones US Publishing Index (^DJUSPB) finished 2014 exactly where it started.
Of course, the elephant in the room for publishers has been the trend to digital publication. Distribution online doesn’t command the same price as traditional publication and the industry has seen margins suffer.
Favorable trends in graduation rates and universal higher education will not slow the trend to digital publishing, but they could help support publication revenues while the companies adjust to a new delivery model. While any policy implementation would likely be more than a year away, momentum for the act could be enough to improve investor sentiment in this battered industry.
Even if President Obama’s education proposal fails to see the light of day, the move to a common core curriculum for secondary education is reviving hope for educational publishers. Forty-three states, the District of Columbia and four territories have voluntarily adopted it and are moving to a common core curriculum, which could cut costs for publishers and drive economy of scale advantages.
Pearson Plc (NYSE: PSO) is the world’s largest educational publisher with $7.6 billion in 2013 education revenue, nearly double the next largest competitor. North American education is the company’s largest business, accounting for 60% of total revenue, representing 5% sales growth in 2013.
Pearson has been proactive in its jump to digital and now books 60% of total sales from digital products and services. Revenue from emerging markets nearly doubled between 2007 and 2013 to $1.3 billion. The company expects 2014 adjusted earnings around $0.98 per share, reflecting a price-to-earnings multiple of around 19.
Houghton Mifflin Harcourt Co. (Nasdaq: HMHC) is a relatively smaller player with $1.2 billion in 2013 education sales. The company booked a 7% growth in both total 2013 net sales and within the education segment. Houghton Mifflin sells mainly to K-12 educational institutions, but may still get a boost as secondary schools prepare more students for higher education.
The educational segment accounts for 87% of total sales, of which 99% is booked in the United States. The company does not break down its educational revenue by print and digital, but has been evolving its business model. Currently, 13% of trade publishing revenue comes from digital products. Houghton Mifflin Harcourt booked a net loss in 2013, but has reported two consecutive profitable quarters in 2014. Analysts expect the company will turn a modest profit in 2016.
Risks To Consider: Any policy implementation for universal community college education is sure to take time, so patience is required for this group.
Action To Take –> Take advantage of the potential for improved sentiment and expectations for publishers from the President’s call for universal community college education. Long-term challenges remain as the industry shifts to digital products, but the shorter-term could see higher share prices.
My colleague Andy Obermueller devotes his time to researching the next Game-Changing Stocks. As I did above, he analyzes current trends to identify companies with the potential for triple-digit returns. This has led to gains of 89%, 92% and even 310% in a year. StreetAuthority compiled a list of the hottest upcoming trends called “The Hottest Investment Opportunities For 2015.” For more information on the game-changing opportunities that could crush the market, click here.