Stock market predicting not just a GOP win, but a ‘wave’

Midterm election plays: Defense, aerospace & more

The stock market is predicting a greater number of GOP victories than polls currently are in Tuesday's midterm elections, according to a study of individual stocks with the most to win and lose from their control.

An equal-weighted portfolio of the stocks that represent the purest plays on a Republican-controlled Congress—like natural gas shipping, for-profit education and medical devices—is up 23 percent in 12 months, the timeframe in which investors began to place bets on this election. Meanwhile, a portfolio of the stocks made up of Democratic pure plays—like solar energy and hospitals—is up just 9 percent over the last 12 months. The S&P 500 is up 16 percent over the same period.

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The stocks on the GOP-favored list added to their gains significantly in the last three months as the midterm elections approached and polls began to show Republicans picking up a greater and greater number of seats. Apollo Education Group, a for-profit education company, and bond insurer MGIC Investment, led the way with double-digit gains.

"This might be a wave election, where both houses come in better than expectations for Republicans," said Larry McDonald, head of U.S. strategy at Macro Group, Newedge USA, in New York. Republican gains in polls are "the reason the stock market has bounced back so much."

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The portfolios were constructed by CNBC using after a review of work from analysts such as McDonald and Daniel Clifton of Strategas Research.

The for-profit education industry could be one of the most-affected industries should the Republicans win big Tuesday.

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"Reauthorization of the Higher Education Act could present opportunity to loosen some of the administrative regulations placed on the industry in recent years," wrote Clifton, in a note last week. "The past several years have been tough for these companies due to new regulations."

Most oil and coal stocks were left out of the Republican portfolio by because the free fall in energy prices outweighs any benefit of a friendlier Congress.

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However, that means names left out—like Consol Energy and Peabody Energy—may be the place to look for returns if the Republicans win big Tuesday as the sweep may not yet be priced in.

"I would buy coal names as they've been annihilated," McDonald said. "If these guys (Republicans) can protect the coal industry for two years and then win the White House, it changes everything."