In Real Money: Sane Investing in an Insane World, Jim made the great point that professional investors on Wall Street don't pay enough attention to what's happening in Washington.
Federal policy can have an enormous impact on stocks, all the more so because the effects that legislation can have on a company's earnings tend to be underestimated by the institutional money managers who spend all their time reading the business pages while ignoring the rest of the paper.
Yesterday when we started our series on companies that stand to gain from the Medicare bill, Jim pointed out that the last time Congress passed the bill, six months ago, Kindred Healthcare and Healthsouth, two big beneficiaries, each rose 16%. This time around we think the same will happen with Fresenius Medical, Allscripts, and ResMed, along with a player to be named tomorrow.
Now if you believed that the market was perfectly rational and all the relevant information about a stock was reflected in its price at any given time – an insane position that even the economists who propound it only use as a model – none of these Medicare plays would work. If the market worked that way, the Street would already have figured how great the Medicare bill, which is almost sure to pass given that most Congressmen would be insane to cut Medicare funding during an election year, is for these companies and taken their stocks higher.
But that hasn't happened, because not enough people on the Street are paying attention.
I would find that fact totally unbelievable if I hadn't seen the same scenario play out time and again. We view the federal government as a great promoter of certain businesses, spending billions that go straight to the bottom lines of politically blessed companies. That's why we constantly talk about our government of, for and by the corporation. Sure, that statement is one-half sarcastic criticism, but the other half is honest, pro-shareholder glee at the fact that the feds – Democrats and Republicans alike – are so eager to pass laws that send money into corporate coffers.
There aren't that many areas where you, the individual investor, can get an edge that the big-money guys don't have, but analyzing companies that grow fat feeding at the federal trough is one of them, if only because the Wall Streeters don't think the government is as important to stocks as it truly is. They're all focused on earnings models, while we focus on federal boondoggles so that you can have your edge.
Cliff Mason is the Senior Writer of CNBC's Mad Money w/Jim Cramer, and has been that program's primary writer, in cooperation with and under the supervision of Jim Cramer, since he began at CNBC as an intern during the summer of 2005. Mason was the author of a column at TheStreet.com during 2007, which he describes as "hilarious, if short-lived." He graduated from Harvard College in 2007. It was at Harvard that Mason learned to multi-task, mastering the art of seeming to pay attention to professors while writing scripts for Mad Money. Mason has co-written two books with Jim Cramer: Jim Cramer's Mad Money: Watch TV, Get Rich and Stay Mad For Life: Get Rich, Stay Rich (Make Your Kids Even Richer). He is 100% responsible for any parts of either book that you did not like.
Mason has also had a fruitful relationship with Jim Cramer as his nephew for the last 23 years and will hopefully continue to hold that position for many more as long as he doesn't do anything to get himself kicked out of the family.
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