Cramer: The Real Winners in These Midterm Elections
“We got two huge multiple-enhancing events this week,” Cramer said Wednesday, “the Republicans taking Congress and Bernanke's QE2 intervention. To me, that means the whole market goes higher.”
That multiple is more important than you may think. Yes, earnings are important when it comes to figuring out what a stock is worth, but so too is the amount, or the multiple, that Wall Street is willing to pay for it. And under a Democratic Congress that number was less than when Republicans were in control.
Check the stats: Between 2001 and 2006, during the Republican majority, the S&P 500’s price-to-earnings multiple was 18.5. Since the Dems took over almost four years ago, the average P/E has been 15.1. And it’s 14.8 right now.
Wall Street just wasn’t willing to shell out extra for stocks while soon-to-be-former Speaker of the House Nancy Pelosi was controlling Washington’s legislative agenda. And from a business perspective, who could blame them? Pelosi endorsed “card check,” which makes it easier for employees to unionize but hurts companies like Walmart. She pushed for cap-and-trade regulations that would cut into energy firms’ profits. She was a big proponent of health-care reform, an attempt, among other things, to rein in insurance companies.
“In other words,” Cramer said, “she favored actions that would make everyone pay less for the earnings of many different American companies because her reach was broad and her ax mighty sharp.”
But Pelosi is no longer in power. And that, along with the Federal Reserve’s additional $600 billion commitment to spurring the US economy, means the S&P should add at least one more point its P/E multiple. So if the Street was willing to pay 14 times earnings, now the number is 15. Apple , therefore, which Cramer thinks will earn $22 a share in fiscal 2011, can add $22 to its share price. The same formula works for any stock now, too.
In addition to, obviously, the American shareholder being the real winner in Tuesday’s midterm elections, Cramer thinks another group came out on top as well: the coal miners. They poured money into key races in Missouri, Texas, West Virginia and Ohio—even gave $300,000 to Rep. John Boehner’s political action committee—and it paid off. Now Big Coal can use its friends in Washington to steer the Environmental Protection Agency away from coming down so hard on the industry.
Not that the EPA can be stopped dead in its tracks. Not by any means, Cramer said, which is why he endorsed Peabody Energy . At most, he thinks the EPA will be forced to focus largely on the more harmful mountaintop mining while easing up on the Powder River Basin coal that BTU mines. Regular viewers of “Mad Money” already know how much Cramer likes this stock, but Tuesday’s election results could put the company’s earnings per share at $5. If he’s right about that 15 multiple for the S&P, then that means BTU should trade to $75 a share.
“Not bad for a stock that went out today at $53.90,” Cramer said.
When this story published, Cramer's charitable trust owned Apple.
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