Investors are often perplexed by the proficiency and expertise of American politicians when it comes to stock picking. Their portfolios have beaten the market time and again. When you start scrutinizing the returns of stock portfolios of US Congress members and Senators, you will come across several studies that approach the topic from various angles. But a 2011 study titled Abnormal Returns From the Common Stock Investments of Members of the U.S. House of Representatives is one of the most important research pieces in this domain. The study showed that stock picks of US Congress members were seen to perform exceptionally well in the long term. But what does "abnormal returns" mean? Back in 2011, a New York Times writer called one of the authors of the study to ask him what he meant by "abnormal returns." The term, according to Alan J. Ziobrowski from Georgia State University, was used to describe profits "beyond the area that we would call normal good fortune." These returns referred to money too big to "assume that they are just plain dumb-lucky.”
House Members Operate With "Substantial Information Advantage"
So what were the key findings of this study? The study analyzed stock trades of House Members from 1985 through 2001. The results showed that House Members earn "statistically significant positive abnormal returns" because they usually operate with a "substantial information advantage."
The study said that a portfolio imitating US House Members' common stock purchases on a trade-weighted basis outperforms the market by 55 basis points per month (over 6% per year).
Another important takeaway from this study was that the number of US Congress members taking interest in stock trading has only increased over the past decades. The study showed that the number of representatives trading stocks went from 41 traders in 1985 to 91 traders in 2001.
Democrats Vs Republicans: Who's Good at Stock-Picking?
The research paper also talked about the performance of US politicians on party basis. Do Democrats perform better than Republicans? The results of the paper show that US politicians from the party in power perform better than their counterparts. This shows that informational advantage, influence and connections do play a key role in US politicians' stock trades. The research said:
"When stock purchases are equal-weighted we find no significant abnormal returns for either Democrats or Republicans. When the portfolios are tradeweighted, the samples of both Democrats and Republicans produce positive, statistically significant CAPM alphas. Only the Democratic, trade-weighted portfolio yields a significant positive Fama-French alpha. Furthermore, the nested test for significance of party affiliation indicates that the Democratic sample significantly outperformed the Republican sample. The Democratic sample beat the market by 73 basis points per month (nearly 9% annually) versus only 18 basis points per month (approximately 2% annually) for the Republican sample. Given the almost folkloric belief that Wall Street invariably favors Republicans, the superior performance of trades made by Democratic Representatives may seem surprising. However, it should be noted that Democrats controlled the House for 10 of the 17 years covered by this study. Furthermore, Democrats were deeply entrenched in the leadership of the House for decades prior to the study. Thus when Republicans finally took control in 1995, they arguably had far less experience at handling the reins of power and may therefore have been unable to immediately enjoy all its perquisites."
Republican Congress Members and Insiders are Buying These Stocks
Methodology
For this article, we first scanned the holdings of the Subversive Unusual Whales Republican ETF (KRUZ) that invests stocks bought or sold by Republican members of Congress and their spouses. From these stocks we picked 10 stocks that also saw insider buying activity from corporate insiders like executives, directors and officers over the past one year. Insider Monkey’s monthly newsletter and portfolio that focuses on activist hedge funds, insider trading and stock picks from hedge fund investor newsletters and conferences returned 199.2% between March 2017 and March 12, 2024 and outperformed the S&P 500 ETFs’ 144.9% gain by more than 54 percentage points.
Dollar Tree Inc (NASDAQ:DLTR) saw insider buying activity earlier this month when its CFO Jeffrey A. Davis bought 1,800 shares of Dollar Tree Inc (NASDAQ:DLTR) at $136.00 per share on April 1. Since then through April 22 the stock is down 10.45%.
“Dollar Tree, Inc. (NASDAQ:DLTR) underperformed in the quarter following a messy earnings report that showed inconsistent results at Family Dollar. Given it is still early in Family Dollar’s turnaround effort, we had been expecting the potential for choppy performance, and weren’t that surprised by the result. What we found more notable were the strong results from the Dollar Tree stores, as they are the primarily value driver for the overall company.”
On February 6, 2024, Christopher L. Winfrey, the President and CEO of Charter Communications Inc (NASDAQ:CHTR), bought 5,050 shares of Charter Communications Inc (NASDAQ:CHTR) at $295.29 per share. Since then through April 22 the stock is down 9%.
Oakmark Global Select Fund stated the following regarding Charter Communications, Inc. (NASDAQ:CHTR) in its first quarter 2024 investor letter:
“Charter Communications, Inc. (NASDAQ:CHTR) was a top detractor during the quarter. In February, the stock price fell when the company reported that broadband subscribers declined 0.2% sequentially. We anticipate that broadband subscriber growth will remain challenging in the near term due to a heightened competitive environment and the likely wind-down of a government subsidy program. However, we expect these competitive forces will abate over the medium term and that Charter’s broadband subscriber base will return to normal growth. In the meantime, the company continues to grow earnings, invest in high-return capital projects and repurchase stock. We maintain our belief in the long-term prospects of Charter Communications.”
Wells Fargo & Co (NYSE:WFC) is a stock liked by Republican House members and it has also seen an important insider buying transaction from a company director over the past six months. The Unusual Whales Republican ETF (KRUZ) owns a $136,994.50 stake in Wells Fargo & Co (NYSE:WFC).
On November 9, 2023, Richard K. Davis, a director of Wells Fargo & Company, bought 3,500 shares of Wells Fargo & Co (NYSE:WFC) at $41.22 per share. Since then through April 22 the stock has gained about 51%.
ClearBridge Value Equity Strategy stated the following regarding Wells Fargo & Company (NYSE:WFC) in its fourth quarter 2023 investor letter:
“Stock selection in the financials sector proved to be the largest contributor to relative outperformance. Banking stocks such as Wells Fargo & Company (NYSE:WFC) saw their share price rise during the quarter as investors anticipated Fed rate cuts that would reduce deposit costs while retaining economic strength and minimizing the risk of credit losses.”
FedEx Corp (NYSE:FDX) is one of the stocks Republicans and corporate insiders are buying. The Unusual Whales Republican ETF(KRUZ) owns a $141,237.71 stake in FedEx Corp (NYSE:FDX).
John W. Dietrich, the EVP Chief Financial Officer of FedEx Corp, on December 28, 2023, bought 1,000 shares of FedEx Corp (NYSE:FDX) at $252.02 per share. Since then through April 22 the stock has gained about 6.5%.
“Other Q4 laggards were global reinsurer Arch Capital and shipping company FedEx Corporation (NYSE:FDX)—holdings that pulled back following large gains. Back in September 2022, FedEx was selling for less than 8X our estimate of normalized earnings due to substantial pessimism. Although the demand environment remains challenging globally, particularly in the Express segment, the company is delivering solid earnings growth driven by cost savings initiatives. FedEx’s DRIVE program, which seeks to deliver $4 billion in permanent cost reductions by creating an integrated air-ground network similar to that of rival UPS, is showing progress, and workforce reductions have also been enacted. While operating results can be choppy, FedEx’s longer term business economics are highly favorable given the global shipping industry’s consolidated structure and massive barriers to entry that afford operators with pricing power to counter cost inflation and earn respectable returns on capital over the business cycle.”
AT&T Inc (NYSE:T) is one of the stocks Republican Congress members like. The stock is part of the Unusual Whales Republican ETF and saw insider buying over the past few months. On November 13, 2023, Stephen J. Luczo, a director at AT&T Inc's (NYSE:T) board, bought 62,500 shares at $15.55 per share. Since then the stock has gained about 4.6% as of April 22.
As of the end of the fourth quarter of 2023, 66 hedge funds out of the 933 funds in Insider Monkey's database had stakes in AT&T Inc (NYSE:T), up from 52 hedge funds in the previous quarter. The biggest hedge fund stakeholder of AT&T Inc (NYSE:T) during this period was Ken Griffin's Citadel Investment Group which owns an $852 million stake in AT&T Inc (NYSE:T).
Miller Value Income Strategy made the following comment about AT&T Inc. (NYSE:T) in its Q3 2023 investor letter:
“Our third-largest holding at quarter end was AT&T Inc. (NYSE:T), a leading provider of communications and connectivity services in the US. At $15/share, the stock trades at the same price it did almost thirty years ago. The share price is much less interesting to us in relation to where it has traded in the past than in relation to how much cash the company generates and what management is doing with it. At just over 6x earnings, the stock trades near its lowest price-to-earnings (P/E) multiple ever, also representing close to its largest-ever P/E discount to the stock market. The business converts most of its earnings to free cash flow, implying a forward free cash flow yield north of 15%. Just under half of free cash flow is going toward the dividend (7.5% yield), while much of the balance is going to debt paydown. In other words, if the stock does not fall below its lowest-ever valuation, investors clip a rock-solid 7.5% in cash, while owning a growing portion of a very steady business as management reduces debt outstanding. A discounted cash flow model will suggest that intrinsic value for shares begins with a “2,” suggesting the stock is undervalued on an absolute basis. The lack of volatility in the underlying fundamentals also makes it unique when compared to many other things we own, which reduces the probability of permanent capital impairment and argues for a significant weight in the portfolio.