Election Results Aren't a Good Stock Screen

• ByTim Melvin, RealMoney.com Contributor
• On Thursday November 6, 2008, 2:15 pm EST

It is finally over. No more endless election commercials, no more debates, arguments, pontification or discussions on presidential politics. The polls are closed, and we have a new president. Some people are thrilled, others perhaps less so. But it is over.

Already this morning, the financial networks and Internet sites are buzzing with the question, what are the Obama stocks? Wall Street is very busy trying to figure out which stocks will benefit from the new president's economic policies and intentions. I have been guilty of it as well. We all have.

But we have to use caution when we think this way. To simply buy stocks in industry groups because we think they will benefit form the administration's policies is a dangerous game. A lot of money is going to get lost this way.

Let's look at some of the groups that observers expect to be influenced for good or bad by President-Elect Obama's policies. Education stocks are thought to be positioned to do very well under a new administration. The companies may prosper, but the stocks are far from cheap.

Strayer Education is thought to be the class of the industry. It is a great company, and the business is doing well. Does that mean we should own it? That depends how you feel about paying 40 times earnings for a stock. Personally, I am more likely to short that stock if it goes back to new highs any time soon. It is not realistic to assume a company can keep up with the expectations reflected in a price-to-earnings ratio of 40.

Devry is also a very good company. At 30 times earnings, it is not cheap. All of these stocks look pricey to me, and I will pass, regardless of the anticipated political benefits.

Coal stocks are though to be a casualty of the new president's policies. So we should short them, right? How do you feel about shorting stocks that have already dropped 50% to 60% from their highs? Personally I am against it.

Peabody has fallen more than 60% from the highs this year. One of my favorite coal stocks, International Coal, is at less than a third of the 52-week highs. Massey Coal is down almost 80%. These stocks were crushed in the hedge-fund deleveraging last month. I may not be ready to buy coal across the board, but I am not going to short them at these levels either.

I am close to buying International Coal, because betting with Wilbur Ross has made me money when the stock has gotten to these levels in the past. No matter what we spend on alternative fuels in the next four years, we are still going to use coal. Any policy that prevents it will be reversed when the reality of higher power costs shows up in the economy.

Infrastructure stocks are should do well under the Obama administration. He is expected to use a touch of Keynesian economics to revive the economy through capital projects. Now, this idea I am on board with. I wrote earlier this year that this group was probably the next bubble. Just two weeks ago I wrote about some stocks in the group I really like. I still like them, although they need to pull back a bit before I buy more.

Companies such as LB Foster, Perini Corporation and Granite are well positioned to benefit from increased capital spending. That is not the reason I like them; I like them because they are cheap. They sell at low multiples of earnings and cash flow. They had EV/EBITDA ratios less than 5 with sound balance sheets. Presidential politics have nothing to do with my decision to buy infrastructure stocks. I bought them because they are cheap.

As James Altucher pointed out this morning, agriculture stocks are expected to benefit from President Obama's pro-ethanol policies. His commitment to foreign aid should boost the group as well. They are on my radar screen right now. It has nothing to do with the agricultural and energy polices of the new administration. Rather, they are fast-growing companies with single-digit P/E ratios.

The group was heavily owned by hedge funds and has been sold mercilessly. If there is another round of hedge-fund dumping, I could easily see myself buying Mosaic and Potash. Darling International may benefit from ag as well as from energy polices in the next four years. I own it because it is a cheap stock in a great little company.

Don't buy stocks on the basis of what you think politicians may do. As a species, politicians are entirely too unpredictable to be a basis for investment decisions. Buy stocks that are cheap on the basis of assets or earnings power. Be like Walter Schloss and avoid companies with a lot of debt. Pay attention to insiders. Presidents come, and presidents go. History has proven that paying attention to value and risk works no matter who lives on Pennsylvania Avenue.