These stocks offer some insulation against election volatility

By James Rogers

Defense-focused names and the telecom sector are among the areas that could offer stability, according to KeyBanc Capital Markets

As the U.S. gears up for November's presidential election, stocks across sectors such as defense, telecom, water, environment and construction could provide refuge from any volatility that arises, according to KeyBanc Capital Markets.

"We believe that defense focused names offer some insulation against election related volatility," KeyBanc Capital Markets analyst Sangita Jain wrote in a note released Tuesday. Set against this backdrop, KeyBanc Capital Markets reiterated its overweight rating for government contractor KBR Inc. (KBR) and for defense, intelligence and infrastructure firm Parsons Corp. (PSN). "KBR trades at a meaningful discount to its SOTP (sum-of-the parts) valuation and [Parsons] offers exposure to [the Defense Department's] cybersecurity/intelligence programs," Jain wrote.

Separately, Leon Cooperman's hedge fund picked up a stake in KBR in the first quarter of 2024, according to filings with the Securities and Exchange Commission.

Related: A Trump White House could see M&A uptick in these sectors

Of 12 analysts surveyed by FactSet, 11 have an overweight or buy rating for KBR, and one has a hold rating. Of 10 analysts who cover Parsons, nine have an overweight or buy rating and one has a hold rating.

Additionally, telecom remains "an election agnostic theme with very strong business fundamentals to boot," according to KeyBanc Capital Markets, which pointed to its overweight ratings for MasTec Inc. (MTZ) and Dycom Industries Inc. (DY).

"[MasTec] is exposed to a strengthening wireless telecom theme and wireline exposure to funding that is insulated from policy changes post elections," wrote Jain. "We see [Dycom] as a pure play telecom operator best positioned to benefit from BEAD funding." The Broadband Equity Access and Deployment program is providing $42.45 billion to expand high-speed internet access.

Of 14 analysts surveyed by FactSet, 10 have an overweight or buy rating for MasTec and four have a hold rating. All of the nine analysts surveyed by FactSet have a buy rating for Dycom.

Related: This is what a Trump White House could mean for tech M&A, Tesla and tariffs

KeyBanc Capital Markets also pointed to water and environmental stocks, particularly in the wake of the Supreme Court's recent ruling overturning the Chevron decision. "With increasing likelihood of a Trump term and the SCOTUS ruling on Chevron, investors are questioning the resilience of the water/environmental theme," Jain wrote. "We believe that the theme will remain a strong one to invest in (look back at Trump's first term when [Tetra Tech Inc.'s] federal business grew 8% on an NSR basis) given increasing climate disasters and the awareness around PFAS contamination."

PFAS, or perfluoroalkyl and polyfluoroalkyl substances, are sometimes known as "forever chemicals."

KeyBanc Capital Markets maintained its overweight rating for consulting and engineering services company Tetra Tech (TTEK) and infrastructure consulting firm Aecom (ACM), "which we think are among the best ways to play the theme," Jain wrote.

Of seven analysts surveyed by FactSet, five have a buy rating and two have a hold rating for Tetra Tech. Of 13 analysts, 11 have an overweight or buy rating and two have a hold rating for Aecom.

KeyBanc Capital Markets upgraded engineering and construction company Fluor Corp. (FLR) to overweight. "[Fluor] offers a unique way to participate in the re-industrialization themes prevalent in the U.S. and Europe that are likely to prevail regardless of the outcome of the 2024 elections," wrote Jain. "We think its discounted valuation (8.8x 2025E EBITDA) and the 80% reimbursable backlog make it a less risky infrastructure name vs. its earlier incarnation."

Related: Supreme Court overturns Chevron decision, weakening federal regulators

Of 10 analysts surveyed by FactSet, six have an overweight or buy rating and four have a hold rating for Fluor.

Louis Goss contributed.

-James Rogers

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07-18-24 0623ET

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