Stocks That Will Suffer at the Hands of Congress

Not everything the government touches turns to gold.

Some things Uncle Sam targets wither — or worse.

Consider banks. The nation’s banks charged a total of $39.5 billion in fees on deposit accounts in 2008, according to FDIC data. Were the federal government, through its regulatory powers, to outlaw such fees, banks would lose a revenue stream that typically accounts for a quarter to a third of the entire industry’s net earnings.

At this point, such a move — which no one is proposing, I only use it as a hypothetical — would kill the weakened industry.

Now, that’s not likely to happen, right?

Obviously not. The government has wisely moved to help banks, and it’s not about to hamstring their recovery by ending fees. But, yes, it could happen. With the stroke of a pen.

And it’s not an altogether crazy notion. Credit-card industry executives, second cousins to bankers, met with President Obama at the White House on April 23, 2009. On May 11, 2009, the president called on Congress to pass a bill reforming the industry’s practices — which is code for restricting the fees it charges, many of which Mr. Obama sees as exorbitant. And to protect consumers, the president might indeed sign legislation that severely restricts credit-card issuers’ profitability.

Let’s take a look at three other areas likely to run into trouble under the current administration. Not only should investors steer clear of these stocks, but they also might consider “shorting” the shares — that is, taking a position that profits when a stock price falls.

Stocks That Will Suffer — Group #1
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Power Companies That Rely on Coal-Fired Electric Plants
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While campaigning, then Sen. Obama said in no uncertain terms that coal was no longer a viable source of electricity. “If somebody wants to build a coal-powered plant, they can; it’s just that it will bankrupt them because they’re going to be charged a huge sum for all that greenhouse gas that’s being emitted.” It’s not just that the president wants to support clean energy; he wants to actively discourage other energy sources.

In April 2009, the Environmental Protection Agency declared that carbon dioxide (CO2) and five other industrial emissions threaten the planet. With this finding the administration seeks to limit emissions and create a cash incentive for companies that produce less than their allotted levels. It will amount to the most historic environmental shift since the Clean Air Act of 1963.

In 2006, according to the Congressional Budget Office, the United States emitted 7.1 billion metric tons of CO2 equivalent. All told, 86% of U.S. emissions are related to energy production. And 94% of CO2 comes from the combustion of fossil fuels. The two biggest emitters of carbon are automobiles (40% of CO2) and coal-fired electric power plants, which account for 35% of CO2 emissions.

The cap-and-trade legislation obviously will have far-reaching impacts on industry, but particularly on coal-fired power plants. Those plants represent a substantial part of the nation’s energy infrastructure: Coal provides the lion’s share of the power in most U.S. states.

With this giant risk looming over the industry, prudent investors must avoid the following stocks:

American Electric Power (NYSE: AEP), the largest U.S. utility, has a capacity of nearly 38,000 megawatts, 73% of which is powered by coal. AEP has a reputation as a solid low-cost producer, but a potential cap-and-trade system would have a significant adverse impact on this $12 billion utility. This could send shares of AEP even lower.

Duke Energy (NYSE: DUK) is the nation’s third-largest utility. Here’s what it had to say in its most recent annual report about upcoming greenhouse regulations: “We have . . . a lot of plants that use coal, the most CO2-intense fuel. We were concerned about how this would impact our region and our customers. Unlike many businesses, we can’t simply close our operations and relocate to a lower-cost country.” Clearly putting additional costs on carbon would have a major negative impact on Duke’s results.

Other big coal users to steer clear of: Mirant (NYSE: MIR) and RRI Energy (NYSE: RRI).

Stocks That Will Suffer — Group #2
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Student Loan Providers
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Mr. Obama’s 2010 budget takes an axe to the $85 billion student loan market, ending private sector participation in the business by eliminating the giant federally guaranteed student loan program. Rather than support private-sector lenders, Mr. Obama prefers that the Education Department administer the loans directly.

This is a high-volume, low-margin business. Some $89.5 billion in loans were originated for the 2007-08 school year, and $22.5 billion of those were private loans. It’s a risky business: The default rate on student loans is about 7% — about what it is for credit cards — though the loan balances can’t be discharged in bankruptcy. The average student leaves school with $22,500 in student loan debt, according to the National Postsecondary Student Aid Study.

The largest player in this space is Sallie Mae, now known formally as SLM Corp. (NYSE: SLM). The company’s shares took a massive hit when the budget initiative was announced in February, falling -30.8% from $8.39 to $5.80. The shares have since lost additional ground and won’t recover. The death knell may come when Obama signs the 2010 budget, assuming the student-loan provision passes Congress.

Many of the large banks that engage in student lending — Bank of America, Citigroup and J.P. Morgan Chase — will be able to wind down their business units and move on — heaven knows they’ve gotten enough cash from Uncle Sam to keep them going. But two other stocks will face the same potentially fatal challenges as SLM: Student Loan Corp (NYSE: STU) and Nelnet (NNI).

Stocks That Will Suffer — Group #3
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Tax Preparation Companies
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Barack Obama doesn’t want you to dread April 15th. The reason millions of Americans hate that day is obvious — they don’t like doing their taxes.

“We need to simplify a monstrous tax code that is far too complicated for most Americans to understand, but just complicated enough for the insiders who know how to game the system,” Obama said. “We will rewrite the tax code so that it puts your interests over any special interest. And we will make it quicker, easier and less expensive for you to file a return.”

Who’s going to be hurt the most by this? The same company whose business is already slipping because of the ease-of-use and convenience of tax-preparation software: H&R Block (NYSE: HRB). The company’s shares will continue to slide.

That matches its business: H&R Block’s net earnings have fallen from $705 million in 2004 to a loss of $473 million in 2008. The number of returns prepared by the Kansas City-based firm slipped -3.1% during the 2008 filing season from the year before, down to 21 million. The average fee was $187.

As Block’s business has slipped, so has its balance sheet. Its cash on hand has dropped by a third. A company with $1.82 billion in shareholder equity in 2004 has seen that crucial level slip to $987 million, a -45% decrease. HRB is still trading at an exceedingly rich price-to-book ratio of 5.6. That’s more than twice the average price/book ratio of the S&P and even greater than the 5.1 multiple achieved by Coca-Cola.

These trends — the drop-off in returns prepared, the falling earnings, the eroding balance sheet — have emerged with the tax system as it is. H&R Block’s service is expensive — nearly four times what most tax-preparation software costs — and the only thing driving its business has been complicated returns that customers are afraid of. Any effort to simplify the tax code is going to hurt an already weakened business. H&R Block let software like TurboTax gain the advantage, and given the trend toward online software, as well as the potential for substantial simplification of the tax code, at this point I think investors should avoid shares of HRB.

There you have it… the blacklist. Now for the exciting stuff: Companies that are profiting from government action and that are virtually immune to economic cycles. Investing in these stocks is like investing in a bull market that never ends. Here are some examples…

Cuts in Government Spending Would Actually Boost Profits for this Unusual Stock
I’ve never seen anything like this: It’s the first time I’ve found an instance where a government spending cut would mean higher profits for a company. Get the name of this stock here.

Wind Power: The Next Way The Government Will Make Investors Rich
President Obama’s vision calls for the United States to produce 15-20% of its electricity from renewable sources by 2030. Leading wind-turbine manufacturers stand to rake in billions as the U.S. and other countries scramble to order thousands of wind turbines to add green power to their grids. I’ve identified the two strongest players in this category. Get the names of these stocks here.

Breakthrough “Oxy-Coal” Discovery Can Power The U.S. For 400 Years
On the vast windswept Wyoming prairie a quiet revolution is taking place. That’s where several companies are working to build a power plant that uses the most promising environmentally friendly technology in the country. You’ll be more amazed when you see the enormous financial implications of this game-changing technology. Get the full story here.

I’ve covered all of these stories in my blog. If you like what you’ve read today, I invite you to subscribe to my blog. It’s 100% free and I will email you the moment I post a new Government-Driven Investing idea. You can subscribe to my blog here.

Happy Returns!