Plays off the State of the Union

 | Feb 12, 2013 | 1:30 PM EST
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In his State of the Union address Tuesday night, President Obama is bound to splice his progressive Inauguration Day themes with budget and economic messages that finally respond to more prominent issues. These will touch on the need to head off the March 1 budget sequester, in addition to talk on immigration reform, gun control and climate change. The speech will also likely address the need to forge a "balanced" deficit reduction deal, while stepping up investments and reforms designed to protect the middle class, such as curbing college costs and expanding mortgage-refinance assistance.

To quickly address immigration reform, Obama will seize the partisan advantage he helped to create for fellow Hill Democrats with his strong showing among Hispanic voters last November. Should investors wake up Wednesday morning with the notion that the time is "now" for immigration reform in Washington, we'd suggest looking at the money transmitters -- Western Union (WU) and MoneyGram (MGI). In the past, conventional wisdom has expected the deportation of resident illegal immigrants, which can disrupt the flow of remittances back to Mexico and other countries -- bread and butter for companies like these.

On climate change, there's been chatter that Obama might reference an evolving initiative at the Environmental Protection Agency -- one that would create efficiency standards for power plants that's similar to its corporate average fuel economy (CAFE) standards on auto fuel and mileage. But, regardless of how he casts his regulatory objectives, it's likely to reinforce the notion that coal-fired power plants will face increasing pushback and pressure, and that the result will hurt both coal producers -- Arch Coal (ACI) and Peabody (BTU) -- as well as dependent utilities American Electric Power (AEP) and First Energy (FE).

How to view any reflexive negative reaction? My partner Jim Lucier would note that EPA can move forward, but only slowly, as "a boa constricter strangling its prey." For this reason, there could be interim value among the coal names for the brave of heart. Meanwhile, he'd see continued confirmation of the bullish natural gas story, for recently troubled Chesapeake (CHK), as well as Devon (DVN), EOG Resources (EOG) and Anadarko (APC).

 On gun control, my colleague Loren Smith sees just a 30% prospect of significant changes to the gun laws (e.g., a restored ban on assault weapons). Nevertheless, he observes that expanded background checks and more stringent regulation of firearms dealers seem more likely. Enactment of any such changes could squeeze private sales and smaller dealers -- while benefiting larger retailers such as Cabela's (CAB), Dick's (DKS) and Wal-Mart (WMT). Meanwhile, there is at least some possibility that Stratasys (SSYS) could be affected by concerns over use of 3D printers to manufacture firearms.

Moving to higher education, Obama will talk about the need to curb tuition increases and student-loan interest rates -- which, as of last summer, are scheduled to double by July. By this point, much of the assault against the for-profit schools has run its course, and Republicans seem resolved to extend the outcomes-based focus to not-for-profit colleges. So this should bring a measure of relief to the embattled for-profit industry and their lobbyists. As a result, if we see any negative reaction toward such names as Apollo Group (APOL), Strayer (STRA), DeVry (DV), Capella (CPLA) and ITT Educational (ESI), it could mean a bottoming.

Meanwhile, the lenders continue to have their own attractive stories -- in part politically immunized by the March 2010 repeal of the former FFELP student loan program. In my view, that's particularly relevant for industry leader Sallie Mae (SLM).

As for homebuilders and mortgage companies, Obama is expected to strike a blow for new Hill proposals to help current but underwater borrowers refinance into Fannie Mae and Freddie Mac loans. While the legislation faces an uphill battle, outsized winners here might be midsized banks that would gain underwriting parity with the big guys. These could include SunTrust (STI), U.S. Bancorp (USB) and BB&T (BBT). Meanwhile, homebuilders -- including Pulte (PHM), Ryan Homes (NVR), Toll Brothers (TOL), KB Home (KBH) and Lennar (LEN) -- would only continue to benefit from a housing market recovery, enhanced by partial relief for some 11 million borrowers who are precariously perched just one bad economic event away from delinquency or default.

Regarding an across-the-board sequester, for months my uber-analyst colleague Byron Callan has written that investors have refused to discount the 9% across-the-board and other budget authority cuts that now seem unavoidable. That began to change at the beginning of the year, but sanguine expectations persist. Should we see investors' faith shaken in such rationality, Byron says look out for softness in L-3 Communications (LLL), Northrop Grumman (NOC), SAIC (SAI) and Huntington Ingalls (HII), in particular.

Non-defense discretionary programs will take a hit as well, although it'll be smaller (5.1%) because of a buffer created by a 2% cut to Medicare providers. Rob Smith of Capital Alpha warns of pain in pure play names dependent upon grants from the National Institute of Health -- genetic analysis/medical tools companies such as Illumina (ILMN), Life Technologies (LIFE) and Pacific Biosciences (PACB).

As for that hit to Medicare providers, it will hardly be painless for hospital companies such as Health South (HLS), HCA (HCA) and Tenet (THC). Nevertheless, as Kim Monk points out, the industry is trying to put the best face on it, suggesting that a sequester might shield them from deeper cuts within the context of a broader budget deal this summer or fall. This spin may or may not provide insulation as investors react to Obama's address. But, regardless, Kim warns that the industry is just as likely to have to give twice -- so the sanguine story about the sequester is hardly assured of proving true.

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