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Many public officials are required to disclose their financial holdings. Some, including President Barack Obama, place most of their investments in mutual funds like the Vanguard 500 Index Inv (VFINX) and Treasury securities. Federal Reserve Chairman Ben Bernanke plays it very safe and holds mostly Treasurys and annuities. Others, like the congressional leadership from both parties, have more diversified holdings.
Public officials report their specific holdings, but not the exact value of their holdings. For example, we know that Secretary of State John Kerry, when he was a senator from Massachusetts, reported holding shares in Google (NASDAQ: GOOG) valued between $850,003 and $1.75 million.
Using these broad ranges, Representative Nancy Pelosi appears to be the wealthiest congressional leader with a net worth of as much as $180 million. House Speaker John Boehner has the lowest net worth, although his assets are worth at least $1.8 million.
It is important to remember that members of Congress are allowed to trade in stocks as long as they disclose their positions.
Some might be very knowledgeable investors and some members may have the ability to understand how new laws will impact different stocks. But there will also be some members who are too busy to manage their own portfolio or are unskilled in stock selection even though they may be talented legislators. We have no way of knowing whether a member of Congress is also a good investor based solely on their most recent public filings.
The four congressional leaders hold positions in 85 individual stocks. They are mostly large-cap stocks, although there are a few small caps in the portfolio. I reviewed this list with my trading system that looks for companies with the strongest cash flow and high relative strength (RS). This is the same system I used to examine the portfolio of Bill Gates and Warren Buffett recently.
Results from the congressional leadership portfolio are impressive. Since 2003, the combibed leaders' portfolio has delivered an average annual gain of 20.11%, and the worst loss over that time was limited to 24%. During that same time, the S&P 500 gained an average of 5.55% a year, but lost more than 55% during the bear market that began in 2008.
The strongest stocks in the congressional leaders' portfolio right now are ITT Corp. (NYSE: ITT) and Shutterfly (NASDAQ: SFLY).
ITT provides highly engineered equipment and support to companies in the energy, transportation and industrial markets. ITT was once a conglomerate with a number of divisions that have been spun off over the years. In the most recent spin-off, completed in 2011, ITT gave shareholders stock in water infrastructure company Xylem (NYSE: XYL) and defense contractor Exelis (NYSE: XLS). Speaker Boehner sold those two companies shortly after receiving the shares. Of course, we have no way of knowing what he was thinking, but we know he made a decision to hold ITT after the spin-off.
Analysts expect the company to grow earnings per share (EPS) at about 11% a year over the next five years. ITT also pays a small dividend and yields about 1.3%. The stock is moving through resistance after a small pullback and could reach $32 fairly quickly.
Longer term, the stock could be worth much more. In the past, the company has paid a dividend of more than 5% on average. The current payout ratio is very low and there is room for the company to increase its dividend. Doing so should move the stock price higher, although that will take time.
It looks like the company may increase the dividend about 10% a year in the future. Combined with earnings growth, this stock could be expected to return 12%-15% a year for the next five years.
Recommended Trade Setup:
-- Buy ITT up to $31-- Set initial stop-loss at $26 and increase the stop as the 26-week moving average rises-- Set initial price target at $42 for a potential 35% gain in 2-3 years
Representative Pelosi has a shorter-term trade idea in her portfolio. Shutterfly is a website that offers online printing services. Users can upload photos and order traditional prints, customized invitations, pillows and other products that include the photo. Sales over the past 12 months totaled more than $660 million, and the company is profitable with analysts projecting EPS growth of about 17% a year.
The chart shows that SFLY could be breaking out of a base with resistance above $53. A 38.2% retracement of the up-move offers a nearby stop-loss level.
-- Buy SFLY on a pullback to $45.75-- Set stop-loss at $40.12-- Set initial price target at $53.83 for a potential 18% gain in 3-6 months
Congressional leaders are generally wealthy individuals and it can be helpful to understand how wealthy people manage their portfolios. Laws require public officials to disclose their holdings and we are then able to find the stocks in those portfolios with the greatest potential.
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