Betting against Donald Trump has been, so far, a loser's game. So the market consensus seems to be that the president-elect will preside over an enactment of broad swaths of the free-market agenda, plus a major rollback of three decades of free trade.
You may choose to sit on the sidelines and watch it all play out, given Mr. Trump's record of proving his critics wrong. But as both a contrarian and as someone who still sees the man as an authoritarian vulgarian, I'm willing to put some money behind the idea of a spectacularly failed Trump administration. To de-Trumpify my portfolio, I'm cashing out of U.S. financials, which I see as having experienced an unjustified boost this past week, and plowing the gains into a couple of stocks that have been punished for their close ties to Mexico.
The market reaction in the wake of the Trump surprise was widespread, with many industries and subsets of companies experiencing sharp gains or declines. Financials jumped in part because of rhetoric suggesting the Dodd-Frank regulatory bill was on the chopping block, as well as for the belief that interest rates will rise once Mr. Trump stimulates the U.S. economy with infrastructure spending.
On the flip side, stocks with ties to free trade, particularly between the United States and Mexico, were punished. Typical of the sentiment: The analysts at Merrill Lynch downgraded auto-parts makers, including Magna International, all the way to "sell" from "buy," according to a report on the investing site ValueWalk. Magna and Delphi Automotive PLC stand to lose the most if the North American free-trade agreement (NAFTA) gets dismantled, the analysts said.
Two other Merrill Lynch downgrades are the ones getting my attention today: railway Kansas City Southern and alcoholic beverage company Constellation Brands.
I already owned a handful of shares of Kansas City Southern, purchased in October, 2014, because I like its exposure to Mexico. The railway, smaller than the North American big four, gets nearly half of its revenue by carrying cargo between the United States and Mexico. Constellation Brands gets more than half its sales from Mexican beer brands, largely imported into the United States – which, right now, have favourable tariff pricing that is now in doubt in the Trump era. Each stock lost roughly 8 per cent of its value in the week following Mr. Trump's election, and Kansas City Southern shares, which once traded at a clear premium to the large railways, are now the cheapest among the U.S. companies.
Citigroup Global Markets Inc. analyst Christian Wetherbee says his initial inclination is to take Mr. Trump "seriously on trade, versus literally," and expects no border wall and no all-out repeal of NAFTA. It's "not irrational" to wipe out Kansas City Southern's price-to-earnings multiple, he says, but it seems to price in the Trump trade risk, "and upside is possible, if not likely, assuming a softer tone from president-elect Trump in the coming months." (For the record, I do not forecast a softer tone from Mr. Trump; I forecast an inability to govern effectively.)
Analysts covering Kansas City Southern had already been cool on the stock, citing mixed financial results and the dent in cash flow from a significant capital-expenditure program, even as there were signs of the long-term payoff from its Mexico plan. As a result, just six of 21 analysts surveyed by Bloomberg have "buys" on the name. (The rest are "holds" with one "sell.")
There's more enthusiasm toward Constellation Brands, which had the misfortune of holding an analyst day to tell its story the day after the election. The investor concerns: a rise in beer import tariffs, and widespread deportations that would remove many of the customers for its Corona, Modelo, Pacifico and Victoria brands. Morgan Stanley analyst Dara Mohsenian calls the decline in the stock "an opportunity," noting in part that taxing beer hurts lower-income voters, and Mr. Trump's "call for mass deportation is unlikely to be implemented." Of the 20 analysts following the shares, 12 have "buys," with nine of those ratings reiterated after the Nov. 8 election.
So, my anti-Trump agenda: Out goes about $65,000 (U.S.) worth of major and regional U.S. banks and brokerages. The $5,600 I made in one week on those stocks – nice job sticking it to the elites, Mr. Trump, by the way – goes into Kansas City Southern and Constellation Brands. And the rest of the money, for now, stays in cash. Investors seem to be pricing in a business-friendly Trump administration that works cohesively with a Republican Congress to stoke the markets. With great sadness, I'll take the other side of that and wager against Mr. Trump.