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Democrats Hold Edge in House Battle: 5 Great Picks

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On Oct 6, voters will head to mid-term polls to decide the fate of the entire House of Representatives as well as crucial Senate seats. Also at stake are numerous state legislature seats, mayoral contests and other special ballots. These elections will hugely determine the fate of taxes, healthcare and immigration.  But these polls also have serious implications for investors.

Democrats are widely expected to take control of the House even as Republicans retain their wafer-thin advantage in the Senate, per several polls and forecasts. Drug and defense stocks would hugely benefit from a divided Congress. This is why you should stock up on them ahead of this widely anticipated contest. 

Republicans to Keep Senate, Democrats to Gain Senate

Leading forecasters have predicted that Democrats will wrest control of the House by the end of this contest. According to forecasts from journalism portal FiveThirtyEight released at the end of last week, Democrats have an 85% chance of taking control of the House by gaining a minimum of 23 seats. The odds of Republicans taking control of the Senate are quite similar, per the poll.

A fresh Washington Post-ABC News national poll, conducted between Oct 29 and Nov 1, also gives the advantage in the House battle to the Democrats. According to the poll, registered voters favor Democratic candidates over Republicans for the House by 50% to 43%.

Likely voters, individuals most likely to vote, in this case per the Washington Post, prefer Democrat to Republican candidates by 51% to 44%. This margin, which has remained flat over polls conducted in the past two weeks, gives Democrats the edge needed to wrest control of the House from Republicans.

Drug, Defense Stocks to Benefit From Divided Congress

In the event of a divided Congress, investors expect little movement on legislation to enact drug price controls, per Goldman Sachs’ chief U.S. equity strategist David Kostin. Investors have likely priced in such an outcome since the S&P 500’s Health Care Select Sector SPDR is up nearly 8% year to date and is one of the best performers for the year so far.

Kostin thinks that this strong performance is based on the belief among investors that Democrats would take the House. Investors think that a divided Congress would lessen chances of significant regulatory changes related to drug pricing. This will be hugely beneficial to pharma stocks.

A gridlock in Washington is also likely to give defense stocks the edge. With the Trump administration focused on increasing defense spending, Pentagon funding would rise in such a situation. Democrats have also agreed to raise the Defense budget for fiscal year 2019.  

Defense stocks are, therefore, likely to gain after the elections. iShares US Aerospace & Defense ETF (ITA) is up 4.7% year to date, higher than the S&P 500’s gain of 1.9% over the same period.

Our Choices

Fresh polls and forecasts indicate that Republicans will retain their majority in the Senate post mid-term elections, even as Democrats wrest control of the House. A divided Congress would make it tough for the Trump administration to push through major policy initiatives.

At the same time, pharma stocks would gain in the absence of major regulatory changes on drug pricing. Defense stocks would also move higher given the Trump administration’s zeal to raise defense spending. This is why it makes sense to invest in stocks from this sector at this time. However, picking winning stocks may prove to be difficult.

This is where our VGM Score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM Score. 

We have narrowed down our search to the following stocks based on a good Zacks Rank and VGM Score.

Bristol-Myers Squibb Company (BMY - Free Report) is a global specialty biopharmaceutical company focused on the development of treatments targeting serious diseases.

Bristol-Myers Squibb has a VGM Score of A. The company has expected earnings growth of 26.6% for the current year. The Zacks Consensus Estimate for the current year has improved by 7.1% over the past 30 days. The stock has a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The company has expected earnings growth of 26.6% for the current year. The Zacks Consensus Estimate for the current year has improved by 7.1% over the past 30 days.

Merck & Co., Inc. (MRK - Free Report) is a global research-driven pharmaceutical products company.

Merck has a Zacks Rank #2 (Buy) and a VGM Score of B. The company has expected earnings growth of 8.9% for the current year. The Zacks Consensus Estimate for the current year has improved by 1.6% over the past 30 days.

Johnson and Johnson, Inc. (JNJ - Free Report) focuses on the development, manufacturing and marketing of pharmaceutical, medical, and consumer related healthcare products.

Johnson and Johnson has a Zacks Rank #2 and VGM Score of B. The company has expected earnings growth of 11.8% for the current year. The Zacks Consensus Estimate for the current year has improved by 0.3% over the past 30 days.

The Boeing Company (BA - Free Report) is a premier jet aircraft manufacturer and one of the largest defense contractors in the United States.

Boeing has a Zacks Rank #2 and VGM Score of B. The company has expected earnings growth of 24.5% for the current year. The Zacks Consensus Estimate for the current year has improved by 3.2% over the past 30 days.

Lockheed Martin Corporation (LMT - Free Report) is the largest defense contractor in the world.

Lockheed Martin has a Zacks Rank #2 and VGM Score of B. The company has expected earnings growth of 31.1% for the current year. The Zacks Consensus Estimate for the current year has improved by 2.7% over the past 30 days.

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