Michael Brush

Company Focus1/3/2007 12:00 AM ET

Stocks that may get a boost from Bush

It's tricky business to predict the themes President Bush will promote in his Jan. 23 State of the Union address. But here are three I think will be on the agenda -- and the stocks that stand to benefit.

By Michael Brush

With rare exceptions, what the Bush administration doesn't want leaked doesn't get leaked. So it's risky to try to guess what companies might benefit from the themes of the president's Jan. 23 State of the Union address.

But a little speculation may be worth the risk: Last year, in his Jan. 31 address, Bush highlighted the need for a greater use of ethanol as an alternative energy source. Farm equipment makers Deere (DE, news, msgs) and AGCO (AG, news, msgs) jumped the next day and finished the year 21% and 60% higher, respectively.

With the help of a few political analysts and a quick spin on the D.C. rumor mill, I've come up with three themes that are likely targets for President Bush's upcoming address.

  • Environmental protection. In response to November's election romp, Bush may reveal a surprising fervor for green policies.

  • Greater sacrifice in Iraq. This will include rhetoric to rally support for the coming "troop surge" and supplemental budgets to pay for big-ticket items such as tanks.

  • Immigration reform. Here he will likely reiterate the need for "guest worker" programs that may appease party loyalists yet permit U.S. companies to continue employing cheap immigrant labor.

Bush's policy pronouncements in these three areas could benefit related stocks for the next two years or more. Here's a closer look at each them and the companies poised to profit.

A convenient policy shift

Bush doesn't have a reputation as being the most environment-friendly president. But signs of a "greener" chief executive will surface in the State of the Union address, say policy analysts. "I expect a fairly significant alternative energy focus, stronger than last year," says James Lucier, a political analyst with Prudential Equity Group.

Washington is abuzz with speculation that Bush may go so far as to announce an epiphany on global warming -- one that has him embracing the issue and offering a "to do" list of policies to combat it, says Karlyn Bowman of the American Enterprise Institute.

It's a rumor, so take it for what it's worth. But even if Bush fails to join former opponent Al Gore and embrace global warming, we'll still see a leftward shift on the environment, for two reasons.

The first is the Schwarzenegger effect. California Gov. Arnold Schwarzenegger was one of the few Republicans to survive the tectonic shift towards Democratic candidates last election. A big reason for Schwarzenegger's success: He turned green.

That tactic didn't go unnoticed in the White House, says Matthew Patsky, who manages the Winslow Green Growth Fund (WGGFX). "I would bet that we end up with the Schwarzenegger model there," says Patsky. "Simply denying that global warming exists is not going to work anymore as a plan."

Another hint that Bush is likely to lay out a green-friendly agenda comes from an unusual place: polar bear policy.

Many environmentalists have long considered polar bears at risk because of purported destruction of their natural habitat by the effects global warming. But recently -- in a dramatic about-face for the Bush administration -- the Interior Department seemed to adopt this idea. In late December, Interior Secretary Dirk Kempthorne announced that polar bears should be listed as "threatened" under the Endangered Species Act of 1973. "We are concerned the polar bears' habitat may literally be melting," Kempthorne said in a press release.

"That's interesting because for most of the time this administration has been in office, no one has been able to act without getting permission from the top," says Patsky.

At the very least, Bush will likely emphasize renewable energy and the need to reduce dependence on fossil fuels for security reasons. Expect details on what Bush wants to see in an alternative energy bill -- which Lucier expects to get passed into law in 2007.

Any Bush reference to alternative energy will spark a rally in the niche sector he chooses to highlight. Last year, for example, fuel cell and solar energy companies like FuelCell Energy (FCEL, news, msgs), Ballard Power Systems (BLDP, news, msgs) and SunPower (SPWR, news, msgs) got a big boost because of a presidential reference to these areas.

It makes sense to own a few "green" stocks that will benefit in the medium term from any Bush shift on environmental policies. Here's a short list of potential candidates suggested by Patsky.

Fuel-Tech

One way to reduce dependence on foreign energy is to better exploit our country's rich coal reserves, says Patsky. The trick is to find ways to make coal burn cleaner. That's where the Batavia, Ill.-based Fuel-Tech (FTEK, news, msgs) comes in. It sells equipment that helps utilities reduce slag and nitrogen oxide emissions when they burn coal.

Currently, Fuel-Tech equipment is used by less than 2% of the more than 1,500 coal-fired plants in this country.

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Patsky thinks Fuel-Tech stock -- which recently sold for $25 -- will easily advance to $40 or $50 as more utilities are won over. "The payback for converting to their process is less than a year, so why wouldn't more utilities install it?" he asks.

Maxwell Technologies

The president will also likely endorse policies supporting popular hybrid cars that run on both electricity and gasoline. A play on this theme is Maxwell Technologies (MXWL, news, msgs), says Patsky. The San Diego company makes "ultra capacitors," or devices that can store a lot more energy than regular batteries and deliver it better in repeated bursts. These devices are used in hybrid cars and wind turbines. In hybrid cars they can help with acceleration and also recapture energy in braking.

Nollenberger Capital Partners analyst William Gibson estimates Maxwell Technologies will see 32% revenue growth this year and 50% growth in 2008, which should help revive the shares.

Color Kinetics

Based in Boston, Color Kinetics (CLRK, news, msgs) designs light-emitting diodes (LED). These are silicon-based systems that emit energy in the form of photons, producing light. Although they are still expensive, these are becoming more popular because they use less energy and produce less heat than regular light bulbs.

LEDs are still chiefly used in commercial settings -- like decorative lighting outside of casinos. But as prices decline over the next two years, use of LEDs will spill over into the home, says Patsky. About a quarter of the electricity generated in this country is used for lighting, so greater use of LEDs could cut back substantially on power use, says Patsky.

More portfolio fuel

This year's State of the Union address will probably announce policies to promote the greater use of biofuels like ethanol. If so, that could revive ethanol stocks like Pacific Ethanol (PEIX, news, msgs) and Green Plains Renewable Energy (GPRE, news, msgs) that have fallen sharply since last May.

Bush may focus in particular on cellulosic ethanol that comes from plant fiber -- as opposed to sources like corn or sugar cane, says Lucier. If so, that could spark a rally in Dyadic International (DIL, news, msgs), which develops enzymes that may help in the production of cellulosic ethanol.

The best offense

In early January, Bush is expected to give an Iraq policy speech in which he will outline the need for a "troop surge" to win the conflict, says JSA Research analyst Paul Nisbet. Nisbet believes that troop surge may have already begun with the Defense Department's late December announcement that the 82nd Airborne Division's 2nd Brigade will deploy to Kuwait.

During the State of the Union speech, Bush will likely reiterate his rationale behind sending more troops to Iraq and requesting supplemental spending for big-ticket items used there like Stryker Light Armored Vehicles and the Abrams battle tank. "We are going to continue with pretty heavy supplemental budgets for the war as long as it's going on," says Nisbet.

Whatever you think of the war, the trend will benefit General Dynamics (GD, news, msgs), which makes the Stryker and the Abrams battle tank, says Nisbet. General Dynamics is also building the first of around 60 "littoral" combat ships that will roll out in coming years. These are smaller, more agile ships the Navy plans to use along coastlines.

Nisbet also likes Northrop Grumman (NOC, news, msgs), because he thinks it is unduly cheap. The company, which makes military electronics, satellites, precision weapons, aircraft and ships, trades for 14.5 times expected 2007 earnings. On average, defense stocks trade for 16.1 times expected earnings, says Nisbet. One big risk for defense stocks: A Democratic sweep of the executive branch and Congress in 2008 may mean reduced defense spending growth.

Exporting dollars

Bush is likely to reiterate his belief that the country needs more secure borders and also "guest worker" programs that allow immigrants to work legally in the U.S. for a fixed number of years.

If those comments quell emotions on the immigration debate at all, that could help lift a cloud over Western Union (WU, news, msgs), the leading money transfer company in the world. Western Union gets at least 25% of its business from U.S.-Mexico money transfers, and its stock took a hit after early-December raids in the U.S. on a company hiring illegal immigrants.

However long it takes to resolve the immigration debate, in the long run developed countries around the globe will continue to hire more immigrants from poorer countries, says Morningstar analyst Mark Weber. Those immigrants will continue to send money home, boosting Western Union profits for many years to come, says Weber.

At the time of publication, Michael Brush did not own or control shares of companies mentioned in this column.

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