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Can these Trump winners extend their gains?

Photo: Krasimir Grozev. Cropped. Licence: http://creativecommons.org/licenses/by-sa/3.0

Following Donald Trump’s surprise election victory, there are some clear winners and losers in the stock markets. Mining, healthcare, financial and defence stocks rallied strongly last week, while defensive sectors such as utilities and consumer staples lost ground.

However, with Trump widely seen as an erratic and unpredictable character, it’s unclear which sectors, and in particular which stocks, will genuinely benefit in the long run. With this in mind, I’m taking a look at whether Trump winners BAE Systems (LSE: BA) and Shire (LSE: SHP) can extend their earlier gains.

More defence spending?

Defence stocks, such as BAE Systems have been flying high, and on the surface, it makes a lot of sense. Trump has pledged to strengthen the military, with particular emphasis on traditional military firepower – a larger army, more navy ships, more fighter aircraft and better nuclear and missile defence capabilities. Defence analysts reckon that if he follows through on what he’s promised, his defence initiatives would add more than $50bn to the US defence budget annually.

With the Republicans maintaining control of Congress, you’d think that Trump is in a strong position to deliver on more defence spending. However, things are never as simple as they seem. The Republicans have a smaller majority in the House than in 2014, and Senate Democrats could still filibuster everything.

In addition, Trump is relying on unrealistic cost savings and efficiency improvement to deliver what he’s promised and has many competing pledges, ranging from increasing infrastructure spending to cutting taxes and reducing the national debt – all of which will no doubt compete for funding.

BAE, which derives 36% of its revenues from the US, may also be hit by Trump’s protectionist views. He’s pledged to bring back jobs to America, and would likely favour US contractors over foreign ones.

Despite this, shares in BAE are up 10.2% in just a week, and currently trade at 14 times expected earnings this year. This forward price-to-earnings multiple is below its five-year historical average of 18.1, which indicates shares in BAE still seem undervalued despite recent gains. 

Policy uncertainty

Trump’s election win has been good news for healthcare stocks and one of the top performers in the London market has been Shire, a biotechnology company that focuses on rare diseases. Shire gets nearly all of its revenues from the US, so it’s no surprise that the stock is more sensitive to potential US policy shifts than GlaxoSmithKline or AstraZeneca.

While both candidates were critical of high drug prices, Trump has been less vocal on measures to regulate prices and has been more supportive of deregulation. This could cut development costs and speed up the approval process – and boost profits for the sector. Nevertheless, he hasn’t given any specifics on his health plan yet, and the potential long-term benefit for the sector remains to be seen.

Shares in Shire already gained 9.9% this week, and currently trade at a forward P/E of 11.4. Although this is significantly below its five-year historical average of 20.8, the firm’s recent disappointing haemophilia drug sales figures point towards slowing earnings growth in the near term.

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Jack Tang has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended AstraZeneca. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.