A baker's dozen U.S. corporate executives are visiting the White House to meet Chinese Premier Hu Jintao Wednesday in an event that's part of President Barack Obama's recent effort to build stronger relationships with the business community. The president clearly hopes closer ties to business will to help his administration boost both job growth and his reelection odds in 2012. That makes sense: Yale economics professor Ray C. Fair has done studies that show that if GDP growth is high enough in the months preceding an election, the president gets a second term.
So that's what's in play this week for Obama, and the nation's economy as a whole. But how can you personally benefit? What might help is to invest in some of the companies whose executives are meeting with Hu. It's not too much of a stretch to imagine that those business leaders will try to use that meeting to gain access to a bigger share of the $400 billion Chinese market.
But those companies should be careful: China likes for foreign firms to export their technology to China so that it can let its state-owned companies copy it, start manufacturing the products there, and raise import tariffs to block the foreign firms' access to the market. For example, according to a recent article in the The Washington Post, Manitowoc, a Wisconsin-based crane manufacturer, had a good export business to China -- until a few years ago. Then, China's state-owned companies began making their own cranes, and Beijing slapped a 30% tariff on Manitowoc's products. Manitowoc has not sold any cranes there in the two years since.
With that in mind, should you invest in those companies, and if so, which ones? Of the nine publicly traded companies among the 13 represented in Wednesday's White House visit, three stocks look like bargains today: Goldman Sachs (GS), Dow Chemical (DOW) and HSBC Holdings (HBC).
How I Define a 'Bargain Stock'
I use the Price/Earnings to Growth ratio (PEG) to assess whether a stock is cheap: A PEG of less than 1 looks good to me. Six of the nine have PEGs greater than 1, and thus look expensive. So, here's my ranking by PEG of the three publicly traded companies whose stocks look under-priced relative to their earnings prospects:
Goldman Sachs: 0.30. This PEG is based on Wednesday's P/E of 9.8 divided by earnings forecast to grow 32.8% to $17.59 in 2011.
Dow Chemical: 0.78. P/E: 25; earnings growth: 32% to $2.45 in 2011.
HSBC: 0.82. P/E:33.3; earnings growth: 40.4% to $5.24 in 2011
How do I know this stock picking method works? I am not 100% sure it does. But in December, I did a similar analysis of 17 companies whose CEOs visited the White House. The average gain of the 16 that are still publicly traded has been 4.8% -- slightly less than the S&P 500's 4.9% rise over the same period. But the four stocks that looked undervalued to me then rose far faster: They're up 8.6%.
Comparing the list of Wednesday's guests to those who got invited to the White House a month ago, it's clear who's really "in." The lucky five are Boeing (BA), Dow, DuPont (DD), General Electric (GE) (which is arming China against Boeing and the U.S. military), and Intel (INTC). Also interesting is that Pepsi (PEP) got invited in December; but this month, rival Coke (KO) is on the list of cool kids.
Meanwhile, things are looking up for 2012 GDP growth -- which bodes well for Obama's reelection hopes. As I reported for DailyFinance last November, Yale's Fair forecast 3.69% GDP growth in the nine months preceding the 2012 election, and he has yet to offer a revised forecast. Back then, based on his numbers, he predicted Obama would win 55.9% of the popular vote. But those calculations didn't take into account the economic stimulus that might follow from the $858 billion tax deal passed in December. In November, analysts predicted 2012 GDP growth of 3.4% -- that has since risen to near 4%, according to the Federal Reserve.
Numbers like those will mean some companies should do quite well indeed. Even if you personally can't get reelected in 2012, you can still profit from investing in the companies whose growth will help Obama get there.
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