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Health and Defense Stocks Are Suffering


A Republican win may hurt government contractors

Companies that count on state and federal spending are trailing the Standard & Poor's 500-stock index for the first time in a year, a sign of concern they'll lose sales should Democrats give up control of Congress. Lockheed Martin (LMT), which gets almost all its revenue from defense projects, fell 5.9 percent from July 2 through Oct. 18 as the S&P 500 rallied 16 percent. Tenet Healthcare (THC) depends on the U.S. for a third of its revenue and is down 17 percent this year. "There's going to be a bridle put on U.S. government spending," says Keith Wirtz, who oversees $18 billion as chief investment officer at Fifth Third Asset Management in Cincinnati. "The market's looking through its binoculars and suggesting less government spending in 2011 and 2012 will hurt the fundamentals of these companies."

A Goldman Sachs (GS) index of contractors getting 20 percent or more of their revenue from governments, which includes Lockheed and Tenet, trailed the S&P 500 last quarter after beating it since September 2009. Investors at BlackRock (BLK), Fifth Third, and Harris Private Bank say budget cuts spurred by Republican victories in the House or Senate may lead to more declines in the shares. The party will hold a 20-seat majority in the House of Representatives following the Nov. 2 vote, according to projections by FiveThirtyEight, a New York Times blog that forecasts elections by analyzing polls. FiveThirtyEight projects that Democrats will have a four-seat advantage in the Senate.

House Republicans announced an agenda on Sept. 23 that would cut spending, extend expiring tax cuts, and repeal the health-care law President Obama signed in March. If they are able to follow through on those pledges, companies with the biggest share of sales to the government "will likely be passed over as we tighten our belts," says Jack Ablin, chief investment officer at Chicago-based Harris, which oversees $55 billion.

Lockheed won't be caught off guard. "We have undertaken a series of actions that are consistent with the new reality of a marketplace in which our customers are pursuing new productivity and savings goals," says Jeffery Adams, a spokesman for Lockheed. ITT, which gets 58 percent of its revenue from its defense segment, has trailed the S&P 500 by about 8 percentage points since July 2. David Albritton, spokesman for White Plains (N.Y.)-based ITT, didn't comment.

Tenet, the third-largest publicly traded U.S. hospital chain, enjoyed a brief rally on Mar. 22, when the House approved the health-care bill, which will extend benefits to 32 million uninsured Americans in 2014. "We saw health-care reform as a net positive for us over the long haul," says Rick Black, spokesman for Tenet, who says Medicaid and Medicare make up about one-third of revenue. "The more people that are covered will be beneficial to the whole system, as well as to hospitals like us." Black declined to comment on the revenue impact of the Republican agenda.

Shares of government contractors may bounce back as investors recognize that the threat of budget reductions is overblown, according to Scott Armiger, who helps manage about $5.6 billion at Christiana Bank & Trust in Greenville, Del. "Cutting government spending is a two-, three-step process," he says. "I don't see it happening in just one midterm election. These companies will be O.K. for the next couple of years. It's an overreaction to the downside, and it could actually be a buying opportunity."

The bottom line: The prospect of Republican electoral gains is leading investors to shun stocks of companies that depend on government spending.

Hwang is a reporter for Bloomberg News. Kisling is a reporter for Bloomberg News .

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