Money

How You Can Profit from the Election

Find out how to cash in on your candidate

By: Kurt Eichenwald; Illustration: Peter Arkle
Published: October 2008   [ Updated: Nov 6, 2008 - 11:45:31 AM ]

David Dreman knows all about the connection between stocks and politics. Back in 1993, Hillarycare was in the headlines and traders feared that the first lady's plan to overhaul the health-care system would hammer pharmaceutical firms' profits. So the stocks plummeted. But Dreman, scouring the market for undervalued shares, saw companies with good long-term growth prospects. Bucking conventional wisdom, he predicted the government wouldn't cut the legs out from under a crucial industry. So he started buying.

"We took a pretty big position, and in the first year, it hurt us," says Dreman, who manages more than $16 billion in mutual funds and managed accounts. "But in years two and three, we doubled or tripled our money."

So how should you assess this election? Focus on three industries: energy, defense, and (of course) health care.

1. If You Expect Obama to Win
"Obama has been talking a lot about alternative energy, which makes me think he'll do something big there, with investment credits or other incentives," says Peter Cohan, president of Peter S. Cohan & Associates, a consulting and venture capital firm. "That should lead investors to pour cash into that area—solar, wind, and so on." You can bet on a market sector through an exchange-traded fund that holds a portfolio of companies within an industry, such as the Van Eck Global Alternative Energy ETF (GEX).

2. If You Expect McCain to Win
"McCain would be much stronger for the defense industry," says Michael Ferguson, an associate professor of finance at the University of Cincinnati. Conversely, defense stocks could take a hit if the market expects an Obama victory. A good way to invest in the sector is through the iShares DJ US Aerospace & Defense fund (ITA).

3. If You're Undecided
Health care is the wild card. Many experts think this industry may be the most affected by the election, but the "how" is uncertain. Uncertainty usually means price declines, which just makes the stocks cheaper than fundamentals would dictate.

Of course, no one should make investing decisions solely on possible outcomes of an unproposed plan. But in this case, it could be a good bet: Health-care stocks have been brutalized in recent months, not only out of electoral concerns but also from concerns about stepped-up regulation and medical costs. So fear has pushed the stocks below the value that their financial performance should command. "Health-care companies have a long history of adjusting to profit under a wide variety of government policies," says Chris Armbruster, an analyst with Al Frank Asset Management. Individuals can invest through the Health Care Select Sector SPDR fund (XLV).