5 Stocks To Combat Election Year Uncertainty

Stocks continued to chalk up substantial gains on Tuesday with benchmarks falling short of new records. This is in keeping with the tone of a rally which is nearly seven and a half years old and is showing no sign of dying out.

However, the investment banking arm of a major U.S. bank thinks that the market may be facing a correction sooner rather than later. One of the major reasons for such a correction could be the uncertainty over the impending presidential election.

Though it is difficult to predict whether this will indeed happen, it may be a good idea to protect the gains you’ve made recently. The best way to do this would be to add low beta stocks to your portfolio. Beta measures the tendency of a stock's returns to respond to market swings.

Election Uncertainty Could Cause Correction

Strategists at Bank of America’s (BAC) investment banking arm Bank of America Merrill Lynch (NYSE:BAC) think that chances of a near term correction are fairly high. In such an event the market could face a decline of at least 10%. According to a client report released on Tuesday, these strategists identified nearly 10 factors which could lead to such an outcome. Prominent among them was uncertainty over the outcome of the election.

Most market watchers believe that Hillary Clinton is all set to win. However, despite the poor headlines and gaffes, Donald Trump is only 4.3 points behind Clinton as per the average of recent polls from Real Clear Politics. The acuteness of the concerns over future government policy is best illustrated by current VIX levels. The market’s fear gauge remains firmly below 12, a firm reminder of the current state of market complacency.

Economic Activity Being Curbed

Additionally, both candidates have held out the hope of strong fiscal policy measures. This includes high level of government spending aimed at job creation and infrastructure development. However, Bank of America Merrill Lynch strategists think that these hopes are likely to be dashed. This is why they believe inordinate expectations for fiscal measures could be another cause for subsequent market losses.

Meanwhile, results of a survey of economists released earlier this month revealed that the majority believed that the upcoming election was curbing economic activity. Conducted by The Wall Street Journal, the survey reflected such opinions for the first time this month. The major reason for such a change in the stance of those surveyed was a decline in business investment for the third consecutive quarter.

Our Choices

Uncertainty over the outcome of an election may lead to a correction in the near term. In such a case it would be a prudent idea to shore up gains made during the long running market rally.

This is why it would be better to pick safer bets at this point. In such a situation, picking stocks with low beta would be a good option. At the same time, it would be a good idea to pick winning stocks, in case the rally continues, even after a few hiccups.

This is where our VGM score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM score.

We have narrowed down our search to the following stocks based on a good Zacks Rank and VGM score.

The Children's Place, Inc. (NASDAQ:PLCE) is a growing specialty retailer of apparel and accessories for children from newborn to twelve years of age.

Children's Place has a Zacks Rank #1 (Strong Buy) and a VGM Score of A. The stock has a beta value of 0.11. The company has expected earnings growth of 30.3% for the current year. Its earnings estimate for the current year has improved by 11.4% over the last 30 days.

Sanderson Farms, Inc. (NASDAQ:SAFM) is a fully integrated poultry processing company engaged in the production, processing, marketing and distribution of fresh and frozen chicken products.

Sanderson Farms has a Zacks Rank #1 and a VGM Score of A. The stock has a beta value of 0.21. Its earnings estimate for the current year has improved by 7.4% over the last 30 days. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 13.81, lower than the industry average of 15.24.

Hallador Energy Company (NASDAQ:HNRG) is engaged in the production and sale of steam coal used for power generation.

Hallador Energy has a Zacks Rank #1 and a VGM Score of A. The stock has a beta value of 0.26. Its earnings estimate for the current year has improved by more than 100% over the last 30 days.

Cooper-Standard Holdings Inc. (NYSE:CPS) operates as a supplier of systems and components for the automotive industry.

Cooper-Standard has a Zacks Rank #1 and a VGM Score of A. The stock has a beta value of 0.64. The company has expected earnings growth of 10.6% for the current year. Its earnings estimate for the current year has improved by 9.3% over the last 30 days. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 9.75, lower than the industry average of 11.71.

Benchmark Electronics Inc. (NYSE:BHE) provides contract electronics manufacturing and design services to original equipment manufacturers in select industries.

Benchmark Electronics has a Zacks Rank #1 and a VGM Score of A. The stock has a beta value of 0.75.