Long Bernie, Short Defence and Pharmaceutical
It is no secret that politics have a massive impact on the market. Figure 1 shows the S&P500 moments after the results indicated Trump was likely to win the election. Initially falling 4% the markets recovered overnight as the uncertainty faded.
Now Trump is up for re-election there is a new candidate with potential (and merit) to beat Trump and have a massive effect on the market.
The candidate in question is Bernie Sanders.
On the 3rd February 2020 the Iowa caucuses took place with Bernie narrowly losing to Pete Buttigieg by 0.004%[1]. However, the Iowa caucus was riddled with glitches and discrepancies; with over 100 precincts reporting results that were internally inconsistent[2]. Furthermore, a smartphone app, used to make voting easier, experienced an unprecedented breakdown leaving Democratic voters in the dark.
Several days after the Iowa caucus New Hampshire held its primaries; In this election Bernie was the clear victor winning by 1.6%[3]. This is a significant win since New Hampshire has been an even state (neither side has the majority) in recent years.
Bernie obtained a significant win in Nevada winning 11 or the 17 counties; with Bernie achieving nearly double the votes of the next candidate- Bernie received 33.2% of votes with Biden receiving just 17%. With Bernie’s campaign being endorsed by a prominent national Latino group known as ‘Mijente’[4] it is no surprise that Bernie received over 50% of the Latino vote. He also won among white voters with a 10% lead on the runner-up Pete Buttigieg.
Biden won the majority of votes of Black voters however Bernie finished in close second[5]. With an estimated 32 million Hispanics being eligible to vote in the 2020 elections, compared to 30million black voters[6], Bernie’s democratic primary success is looking more likely. Bernie also did very well amongst the under 65s obtaining significant victories at each respective age range. The number of votes cast by 18 to 64-year olds is over 3 times larger than the 65+ age [7].
Bernie is reinforcing his democratic leader status achieving wins in both white and non-white states/counties.
Bernie does not have the lead in the South Carolina primaries(polls). In South Carolina Joe Biden has the lead. Having been vice to Barack Obama he has a strong base with the African American democratic electorate which makes up 60% of the entire democratic electorate. Despite this, latest polls show a surge for Bernie Sanders. Its seen that Bernie has seen an increase of 11% in support-just 5 points behind Joe Biden[8]
In the California primaries Bernie is favourite to win. With multiple sources favouring Bernie to win- A survey by the non-partisan Public Policy Institute of California found Sanders favoured by 32% of likely voters in the March 3rd primary[9]. With this large a vote share Bernie can attain California’s delegates since Bernie is followed by Joe Biden with just 14%.
Like the California primaries, Bernie is also favourite to win the Texas primaries. UMass Lowell Centre for Public opinion has Bernie at 23% with Joe Biden closely behind at 20%[10]. However, the survey was published prior to Mijente endorsing Bernie so the lead may widen as Latino Biden supporters change their mind-Biden leads in this voting electorate. This is key since 30.4% of the electorate is Hispanic in Texas.
Based on this information I believe there is a strong likelihood that Bernie will become the primary democratic candidate against Trump. Online polls are showing that Bernie would beat Trump by a significant margin[11].
Bernie’s message throughout his election campaign has been very much for the people and his policies reflect that. The policies of significance are:
· Medicare for All
· Eliminating all Medical Debt
Based on these policies I believe that defence companies such as Raytheon and Lockheed Martin and Pharmaceutical companies will be heavily affected by the new policies Bernie plans to introduce.
Both Raytheon and Lockheed Martin have been prospering massively from the large Department of Defence budget of $686 billion with both CEOs toping the wage leader boards[12]. The Department of Defence announced a $34billion deal for Lockheed’s F-35 jet[13].
Raytheon acquired several contracts with the US military; a $197million contract for the US Air Force to update and modernise its missile warning architecture[14] as well as a $1.03 billion contract from the US Navy[15].
I propose a long-put option on both Raytheon and Lockheed Martin (protecting against lower share prices) as it is likely that both are not likely to remain as prosperous. Medicare for All and expunging all medical debt will not be cheap; Bernie acknowledges this fact and plans to have “a very different military budget”[16] vowing to cut military spending in favour of government programmes[17]. With budget restructuring it is likely that both Lockheed Martin and Raytheon will struggle to maintain revenue streams which will have a major effect on share price.
With the US government providing 70% of Lockheed Martin’s revenue in 2018[18] I believe that Bernie’s election will affect the stock price heavily. In December 2018 Lockheed Martin shares fell 18% due to us government spending fears[19]. Hence, it is likely that the stock will take a similar if not worse hit of around 18%. A strike price of $330 will be profitable.
Raytheon experienced a share price fall of 12% due to government budget disagreements[20]. A strike price of $170 should be appropriate.
I believe the industry that will be most affected by Bernie is the pharmaceutical industry. Under the current health system in the US the top 11 pharmaceutical companies made $711billion in profit over the last 10 years[21]. The per capita drug spending in the US is approximately 40% higher than in Canada and 75% greater than Japan.
Bernie’s ‘Medicare for All’ policy plans to impose a cap on all prescription drug prices; hence as with the defence companies I propose longing OTM (out-of-the-money) puts on Johnson and Johnson, AbbVie, Pfizer and Roche. These companies own the rights to the most popular US prescription drugs with AbbVie’s Humira generating $14billion in sales in 2018 alone[22]. Johnson and Johnsons(J&J) ‘Remicade’ costs approximately £500 in the UK[23] compared to $1200 in the US[24]. AbbVie’s Humira has a similar cost ratio- in the US the average prescription will cost around $2700 compared to $1350 in the UK and $800 in Switzerland[25]. With Bernie cutting prescription drug prices to the median prices of similar Western countries J&J and AbbVie will be significantly affected.
To conclude the chances of Bernie Sanders winning the US election are considerable. Due to Bernie’s progressive policies and widespread reform of several industries in the US I believe that the defence and pharmaceutical industries at serious risk. Hence placing a long-put option, with the earliest post-election expiry, on the key ‘players’ in the respective industries will provide large returns.
[1] https://apnews.com/74508879cd193d3ba1f3b75909c0945e
[3] https://www.bbc.co.uk/news/world-us-canada-51470088
[4] https://www.democracynow.org/2020/2/19/latinx_groups_back_bernie_sanders
[5] https://www.nytimes.com/interactive/2020/02/23/us/politics/2020-nevada-caucus-winners.html
[7] https://www.census.gov/prod/2014pubs/p20-573.pdf
[8] https://thehill.com/homenews/campaign/483939-poll-bidens-lead-in-south-carolina-drops-to-5-points
[10] https://www.uml.edu/docs/2020-TX-highlights_tcm18-322448.pdf
[12] https://www.cnbc.com/2018/03/08/defense-ceo-salaries.html
[14] https://finance.yahoo.com/news/raytheon-help-us-air-force-143300951.html
[15] https://www.fool.com/investing/2019/12/28/lockheed-raytheon-land-billions-in-end-of-year-def.aspx
[16] https://www.vox.com/2019/5/2/18525580/bernie-sanders-plan-cut-military-spending
[19] https://www.fool.com/investing/2019/01/11/heres-why-lockheed-martin-lost-184-in-2018.aspx
[20] https://www.fool.com/investing/2019/01/10/heres-why-raytheon-lost-125-in-december.aspx
[22] https://www.fiercepharma.com/special-report/top-20-drugs-by-2018-u-s-sales
[23] https://www.news-medical.net/health/Infliximab-Cost.aspx
[24] https://www.drugs.com/price-guide/remicade
[25] https://www.vox.com/science-and-health/2016/11/30/12945756/prescription-drug-prices-explained
Brandon Andrews is a Research Analyst for Macro at the London School of Economics’ Investment Research Group.
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