Road Map for Profiting From Debt Dispute

 | Oct 14, 2013 | 11:00 AM EDT
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For most of us eager to see government working on our behalf, the daily news coming out of Washington is very distressing. While there is an outside chance that the current round of "Chicken" between President Obama and the Republican-dominated House of Representatives leads to a debt default and major financial selloff, we don't expect that to happen.

 Because of the catastrophic consequences of such a self-inflicted wound, we believe that there is great likelihood that, despite all the histrionics, there will be a last-minute deal to avert a disaster.

This scenario is quite reminiscent of what took place at the end of 2012, when the fiscal cliff of severe tax increases and federal spending cuts could have severely damaged forward economic growth. What happened then should be a good template for how the current iteration of D.C. paralysis plays out. Importantly, what happened at the end of last year also provides a good road map for how to profit from current weakness in the stock market.

There was also a daily bare knuckle fighting last December with both sides 100% determined not to budge on an agreement. Whenever a deal was rumored, something or someone came out of the woodwork to throw a monkey wrench into the process.

The market treaded water for most of December, but then sold off as it looked like a deal would not materialize before the end-of-year expiration date. Of course, at the very last minute, the grownups took over and a deal was announced.

Ultimately, the rumored deal hit the news during trading on the 31st, and the market rallied, moving 1.6% higher on the day. In fact, from 12/28/12 through 1/4/13, the market rallied over 4.5%.

A lot of the early January move happened either pre- market or as stocks gap-opened. Therefore, there was little opportunity to profit after the good news; gains were made from investing prior to the stocks moving higher.

We expect the same pattern to apply this time around. Last Thursday's rally is an example of this.

We think that during any days of significant market weakness, it makes good sense to selectively buy fundamentally-attractive stocks, which we believe will be primed for a nice short-term bounce on the announcement of a deal.

To develop a list of attractive buy candidates, we screened our universe of stocks that we like and looked for those that had the biggest correction since September 18th (the recent highs). We then took out companies that we thought had some short-term business developments which we thought had factored into their recent pullback. 

What follows is a list of four stocks that we think are prime candidates for a post-deal bounce. For these names, we would dollar cost average in (either by position or by buying on different days). While the market and these names might sell off more between now and the date of announced agreement, we believe all will have proven to be very profitable investments.

We also expect these stocks to move higher before investors would have had a chance to buy at these attractive prices.

Here are four to buy into any additional market weakness:

BB&T Bank (BBT)

Johnson Controls (JCI)

TE Connectivity (TEL)

Wells Fargo (WFC)

We expect to post a few additional names in the next few days into any more pronounced weakness.

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