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Can The Stimulus Bill Still Inspire Your Portfolio? + Vic Wisemann’s Thoughts on: CSCO, DELL, HPQ, CAT, DE, ITW, GE, INTC, IBM, CERN, ECLP

Vic Wisemann
InvestorsObserver
Featured Contributor

Nearly three months after President Obama approved a $787 billion economic stimulus package, intended to create or save jobs, the federal government has paid out less than 6 percent of the money, largely in the form of social service payments to states. Although administration officials say the program is right on schedule, they have actually spent relatively little so far.

The stimulus bill has directly injected around $45.6 billion into the economy, mostly to help states cover the costs of Medicaid and unemployment benefits, one-time $250 checks that were mailed to Social Security recipients last week, and income tax cuts that began to take effect this spring.

Read on to see how the stimulus bill is doing so far and how you can still make a profit from the spending.

Although states around the country are beginning roadwork projects, the Department of Transportation had spent only about $11 million on highway projects through the first week of May. The intent of the stimulus program was to pump money into the economy quickly, and many members of Congress said at the time of its passage that speed was of the essence. But the huge program has been a challenge to administer for both a new administration and for states and local governments grappling with their own fiscal problems.

When I looked at the stimulus package back in February, it was supposed to provide notable investments into infrastructure, renewable fuels, farming and healthcare. Three months after its passage, it's still early to evaluate the full ramifications of the Recovery and Reinvestment Act for the economy. But there are some promising signs.

Paychecks are receiving bumps from the Making Work Pay tax credit, and one major pot of funds, $53.6 billion in aid to states, 82 percent of which must be used for education, started flowing when California received nearly $4 billion in mid-April. Government officials also have reported that many projects are costing them less than expected, as contractors, crunched for cash, compete fiercely for the work.

Modernization of schools is another area that will boost the technology sector. Installing high-speed networks, broadband connections to the Internet and hanging more PCs and servers on these new networks will certainly generate business for hardware companies like Cisco Systems (CSCO), Dell (DELL) and Hewlett-Packard (HPQ). Going further back into the supply chain, this will also generate business for the semiconductor firms that supply these manufacturers and all that hardware will need software to get things all tied together. Finally, there will be work for the local technicians who develop the system designs and perform the installation.

As plans for the expenditures take shape, however, some concerns remain. One worry is the speed of spending. Some funding is getting out relatively quickly. Overall, $69.3 billion of the package has been promised to specific projects, or about $1 billion per day. Only $14.2 billion of that sum has actually been spent, less than 3 percent of the package's roughly $499 billion in new spending provisions.

Regardless of the flow of funds, many companies have seen their stock value move up since the passage of the bill. The two may not be related, but it is an interesting coincidence. In the area of infrastructure, Caterpillar (CAT), Deere (DE), and United Technologies (UTX) all have had double-digit increases in the months since the passage of the bill. There have not been any direct connections to these companies from funds distributed, but they all are in the supply chain for the types of projects targeted in the bill.

As you may recall, I looked at a potential trade on Illinois Tool Works (ITW). The stock was trading in the low 30's at the time and I considered the June 30/25 Bull Put spread for a $1.05 credit. That was a 26.6% return and the stock would have to fall over 10% to cause a problem.

After a poor showing in the earnings confessional and some analyst downgrades, the stock managed to drop over 20% before recovering in early March and moving back above the sold put strike price of 30. The stock is currently about 7% above our region of pain for the trade with three weeks to go for the trade. There are still three weeks to go before this trade expires, but it appears to be in relatively good shape at this point.

The current scramble in health information technology is a lot like the 19th century land rush that opened Oklahoma to homesteaders. Companies are jockeying for new business spurred by a $19.6 billion federal initiative to computerize a health system buried in paper. The billions in taxpayer funds have energized tech titans General Electric (GE), Intel (INTC), and IBM (IBM), all of which are challenging healthcare specialists like Cerner Corp. (CERN) and Eclipsys (ECLP) and other traditional medical suppliers.

Looking over the various companies vying for the available funds, Cerner may look a little pricey, but there may be upside yet because of gaping holes in healthcare information technology that are starting to get filled. For a hedged trade on CERN, you may want to look at the July 50/47.50 Bull Put spread for a 30 cent credit. That's a 13.6% return and the stock has to fall 14.7% to cause a problem.

These types of trades are not without risks. Be certain any trade you enter fits into your personal goals and tolerances. Do your research and have some patience and you will see your investment pay off.

If you have had any additional thoughts, ideas or other ways to profit from the stimulus bill, please e-mail me at vwisemann@InvestorsObserver.com.