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Anticipating A Biden Presidency: My Latest Purchases And The Reasons Behind Them

Dividend Seeker2020-10-14

SummaryI recently made some purchases in both individual stocks and CEFs/ETFs ahead of what I expect to be a volatile end to the year.I will explain the logic behind these buys, which rest on the ...

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This opens up an opportunity for e-commerce plays.Main Thesis/Background The purpose of this article is to discuss a few purchases I have made recently and to give my readers insight into where I think pockets of value still exist in a market that continues to move higher, despite challenging economic conditions. While I see merit to holding onto core market funds, such as ETFs that track the S&P 500 or the aggregate bond market, there are a few specific areas that I think could perform quite well in the months ahead. Although I rarely buy individual stocks, there are three that recently caught my interest as well as one CEF and ETF. As a result, I have shifted some cash into these assets in hopes they will outperform going into 2021. While my outlook for the broader market as a whole remains cautious, I see continued Fed support for the foreseeable future and I expect further Congressional stimulus, two actions that could push markets higher. In a recent review, I discussed increasing my equity hedges, which included positions in gold, municipal bonds, and investment-grade corporates. With the exception of muni bonds, I have little incentive to keep building onto my hedges and, as an investor who adds to my portfolio on a monthly basis, I felt it was an opportune time to get selective on equity purchases. As a result, I have initiated or increased my stakes in the following - Walmart (WMT), Amazon (AMZN), Smith & Wesson Brands, Inc. (SWBI), BlackRock Utility & Infrastructure Trust (BUI), and BlackRock MuniHoldings Quality Fund (MUS). I will discuss my thinking and the reasons behind each purchase in detail below.\n The Holiday Shopping Season Is Ruined: But Not For E-Commerce Plays To begin, I will touch on my positions in both WMT and AMZN. While WMT is a stock I have owned for quite a while, AMZN is a recent purchase. Despite believing in the story behind it, I had limited incentive to pick up the shares, as I already held the company in my broad market funds. In fact, the share of AMZN, and other large-cap tech stocks, continues to grow in the S&P 500, and its dominance had given me enough exposure. However, looking ahead, despite the stock sitting at quite a high level, I think it is poised to do very well in Q4, so I felt compelled to take a small position. My thinking in doing so is similar to why I have owned, and added to, WMT. Simply, these two companies are dominating the e-commerce world, and Covid-19 has exacerbated this fact. While it looked like things were getting better in both Europe and America, signs of a \"second wave\" have renewed calls to shut down, or keep closed, restaurants, shopping malls, and other venues where crowds can congregate. The implication is the holiday shopping season, which is set to begin soon, will not look like any we have seen in a while. Many malls are not back to full capacity, and I do not expect they will be in time to salvage this holiday season. As a result, I see WMT and AMZN getting a surge of new business in the next few months, even though they have already seen a tremendous uptick in sales. To understand why, let us consider how the U.S. consumers have behaved since the pandemic began. While total retail sales have rebounded sharply, the recovery has been very uneven. To illustrate, consider the graphic below, which shows the growth in retail sales by various categories: \n Source: Deloitte As you can see, traditional brick and mortar retail, specifically those that focus on clothing, accessories, and in-store food and beverage consumption, have been hit dramatically hard. Yet, total retail sales are actually up slightly as a whole, driven by non-store retailers. The biggest names in this space are certainly AMZN and WMT, both of which are well positioned to benefit from the continued stay-at-home culture. With both AMZN and WMT expanding and improving their delivery services, they continue to grab a larger share of the retail pie. With partial lockdowns unlikely to be lifted any time soon in many of the hard-hit areas across the country, e-commerce is going to accelerate just in time for the holidays. And e-commerce giants like AMZN and WMT have been setting themselves up to handle this influx of activity. In fact, global spending on warehouses has overtaken spending on traditional retail stores over the past few years, as shown below:  Source: Bloomberg My point here is the pandemic has opened up huge opportunities for WMT and AMZN, both of which have benefited immensely over the past few months. Despite surging share prices, I believe both have room to move higher because initial projections on Covid-19 did not necessarily predict lockdowns continuing into the holiday shopping season. Further, investment in warehouses and storage over the past few years means these companies, along with other online retailers, have the infrastructure to meet high demand. This is a win-win in my view. Biden Thesis Part 1 - Climbing Gun Sales My next three investment plays largely rest on the presumption of a Joe Biden presidency, with the possible exception of muni bonds, which I would favor regardless of the presidential outcome. Starting first with SWBI, this thesis is almost self-explanatory. As civil unrest has rocked the nation, gun sales have soared. The logic is straightforward. Average Americans see what has been happening in multiple cities across the country and have felt the need to have the means of self-protection in their home. While this spike has already been happening, I would expect the surge to continue now that Biden's probability of victory has gone up. Further, I see this as a post-election play as well, especially if we see a Democratic sweep.\n To be fair, this may seem a little late to the game. SWBI has been having a very strong 2020, supported by multiple instances of rioting, looting, and other forms of social unrest driven by fatal shootings by law enforcement and worries over the pandemic. It very well could be that new sales will cool off and history does support this thesis to some degree. In fact, if we look back at other events that have led to surges in gun sales, we see the impact is short term and fleeting, as illustrated below:  Source: Brookings Institute We can draw two different conclusions from the above graph. One, spikes in gun sales often do not last long and almost immediately move back down to their historical average. Two, in contrast, the recent surge could be an exception to this rule. This is because after an initial spike waned, we saw a resurgence of sales that have far exceeded previous highs. This observation could lead investors to believe gun fever still has not peaked, suggesting further upside for SWBI. Of course, we do not know for certain which story will play out, but I see a second reason why I do not believe gun sales have peaked. This is related to the rising chances we will see a President Biden, who is leading by double digits nationally and has a lead in the majority of swing states, according to recent polls from Real Clear Politics (as of 10/7). To understand why, we should think back to President Obama's tenure when gun and ammunition sales soared (Biden was his Vice President). In fact, sales were up markedly during the Obama/Biden years, compared to prior administrations: \n Source: Washington Post Again, this thesis rests on a Biden win, and I also assume we see the House remain in Democratic control, with the Senate up for grabs. If we see a complete sweep, as we did in Obama's first two years, I would expect history to repeat itself when it comes to firearm sales. The ongoing pandemic and general levels of unrest, coupled with a government seen as hostile to private gun ownership, would be a positive development for SWBI. Biden Thesis Part 2 - Rising Taxes Moving deeper into my President Biden thesis, I want to tackle another expected policy development - higher taxes. According to a report by CNBC, two important Biden tax proposals include higher taxes on individuals making more than $400,000 a year and an increase in the corporate tax rate from 21% to 28%. Both of these groups, wealthier individuals and corporations, combine to make up the bulk of the municipal bond market (in terms of demand). Seeing taxes go up on these groups would mean it is logical to assume demand for tax-free munis will increase. As a result, I recently added to my MUS position, although I do hold the Nuveen AMT-Free Quality Municipal Income Fund (NEA) as well as taxable munis through the BlackRock Taxable Municipal Bond Trust (BBN) and the Nuveen Taxable Municipal Income Fund (NBB). I selected MUS to add recently for a couple of reasons. One, the fund trades at a nice discount to NAV, currently around 7%. While NEA also trades at a discount, I find MUS particularly attractive because of a corporate announcement from BlackRock that impacts a large number of CEFs, including MUS. Specifically, at the end of September, BlackRock announced it has reauthorized a share repurchase program, which allows fund managers to purchase up to 5% of outstanding shares on the open market. The primary objective is to \"enhance shareholder value\", specifically by targeting the CEFs that trade at discounts to NAV: \n Source: BlackRock In English, what this announcement means is that BlackRock is allowing fund managers to buy up the shares of the funds it feels are undervalued. This is beneficial for current shareholders because it provides some additional buying momentum for the funds in question. While there are no guarantees as to which funds will, ultimately, see purchases or by how much, MUS is a prime candidate because it trades below its NAV. Thus, while NEA also has a similar discount to NAV, it is not likely to experience the same level of insider buying the way MUS will in the near term, explaining why I favor this fund for muni exposure at the moment. Biden Thesis Part 3 - Higher Infrastructure Spending My final point of a potential Biden presidency again makes a comparison to what we saw during the Obama years. While I noted taxes may go up, which many investors may not find desirable, one area that these taxes may end up being spent is on infrastructure. This is an area that often enjoys bi-partisan support, yet has seen its share of spending, as a percent of GDP, decline measurably over the past decade. If we assume President Biden, and a Democratic Congress, wish to return to Obama era levels, this would be quite a jump from where we are now, as illustrated in the graph below:  Source: Bloomberg In anticipation of a rise in infrastructure spending, I believe BUI is a reasonable way to play this idea. This is a CEF that, instead of amplifying its leverage via borrowing, sells covered call options to attempt to enhance returns. Further, it is a part of the BlackRock share purchase program I mentioned above for MUS. Now, it is important to note that BUI trades at a slight premium to NAV, at 1.4%, so it is not as likely to see fund manager purchases right now. But it often trades at a discount, and it is close enough to its NAV that it would only take a few down days to push it to a discount. If that occurs, I would expect some buying momentum from BlackRock, limiting downside potential in the short term.\n Another reason why I like BUI specifically has to do with its international exposure. While the majority of the assets are U.S.-based, the fund has a substantial amount of international holdings, as shown below:  Source: BlackRock I find this generally attractive right now because there is an appetite for construction and public spending on infrastructure in many European countries as well. This provides a tailwind for BUI that domestic-only funds cannot match. In fact, the International Monetary Fund (IMF) recently published a report urging governments, particularly in central, eastern, and southern Europe, to increase their infrastructure spending in a joint effort. Based on estimates from the IMF, if nations work cooperatively on future projects, the overall positive impact to GDP will be markedly higher, as shown below:  Source: IMF Similar to here in the U.S., plans for public spending on infrastructure and construction are not set in stone in Europe either. But the recent urging by the IMF may cause some action, which would be particularly beneficial for nations like France, Germany, and Italy, which make up the top foreign exposure in BUI. Furthermore, I like the Utilities and Energy sectors as long-term plays under most scenarios, so BUI hits a number of check-marks for me. What If Trump Wins? Of course, a President Biden is not a full gone conclusion. While he is leading in the polls, and that lead has increased recently, we don't have to look further back than 2016 to know how accurate polls can be. Therefore, it is smart to consider what a re-election for President Trump would do to the three points I noted above for playing a Biden presidency.\n Taking each in turn, I think SWBI poses the biggest risk. While gun sales have spiked under President Trump's watch, that is a very recent development driven by social unrest, rather than concerns over changing laws. His tenure and administration have been seen as favorable for gun rights, and that paradoxically is not great news for gun manufacturers. The paradox is, as gun owners, or potential owners, feel their current rights are secure, there is not a pressing need to buy more firearms. When those rights are threatened or at risk, that is when a gun buying spree begins. Therefore, President Trump pulls off another election win, we are secured four more years of a pro-gun rights administration. This will probably cause gun sales to slow a little bit, as the peak of the unrest has passed, and it would be unlikely we see major changes to gun laws over the next two or four years. Thus, SWBI will probably see a bit of a sell-off. Fortunately, the other two areas, municipal bonds and infrastructure spending, should hold up reasonably well under President Trump. While we may not see higher taxes on a federal level under his tenure, state and local taxes are likely to rise to cover Covid-19 deficit spending. Further, his administration will probably continue the SALT deduction cap, which has encouraged many middle and upper-middle class tax filers in high-tax jurisdictions to consider municipal bonds. This has provided a boon period for this asset class, which I foresee continuing under either Trump or Biden. Finally, I believe infrastructure spending will rise over the next four years, benefiting companies in construction and utility sectors either way. While I expect to see more spending under a Biden administration, especially if the Democrats control both the House and the Senate, I do not see a major risk to this thesis under Trump. I imagine Republicans in Congress, along with President Trump, will want to push forward infrastructure plans to help with 2022 election results as well. Therefore, this is another area that I believe will see a larger boom under Biden, but could hold up reasonably well under Trump too.\n Bottom-line This is a difficult investing climate, but I believe there are multiple areas that have potential right now. With e-commerce on the rise, AMZN and WMT are sure to see rising revenues and profits. With social unrest and a democratic majority, I believe we will see a continued rise in the demand for guns and ammunition. If taxes increases, which is almost a certainty regardless of the election outcome, due to the surge in deficit spending, municipal bonds should remain a cornerstone for a diversified portfolio. Finally, I see infrastructure spending rising, both in the U.S. and across the developed world, benefiting funds that hold utility, energy, and construction companies. While there is plenty of uncertainty heading into the final stages of the year, I believe these investments will serve me well, and I encourage investors to consider if any of these options might suit their own individual needs at this time.\nDisclosure: I am/we are long WMT, AMZN, SWBI, MUS, BUI, BBN, NEA, NBB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"hasMoreComments":false,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false}}