Investors are looking for government-dependent stocks to avoid during the debt ceiling drama. At first glance, the debt ceiling might not seem like a big deal. After all, it is something of an artificial limit. Historically, Congress always raises the debt ceiling and the federal government continues its deficit spending as if nothing had happened.
That said, the debt ceiling drama can have a real impact on the economy. In the 2011 U.S. debt ceiling situation, the country’s debt rating was downgraded as a result of that standoff. In another case, a debt ceiling fight led to sequestration which ultimately slashed hundreds of billions of dollars of government spending going forward.
As such, with a debt ceiling crisis seemingly imminent, it’s a good time to consider which government-dependent stocks to avoid today. In general, there’s nothing wrong with investing in government-dependent stocks. But at times of maximum fiscal stress, such as today, it’s wise to avoid stocks affected by this debt ceiling drama.
First Solar (FSLR)
First Solar (NASDAQ:FSLR) is a producer of photovoltaic solar energy solutions. FSLR stock has been shining bright recently, with shares jumping in May on the news of guidance from the Biden Administration around further subsidies for the solar industry.
The problem is that these subsidies are tied to provisions of the Inflation Reduction Act. And that act is a central sticking point in the current debt ceiling fight. Republicans are angling to repeal or undo much of the Inflation Reduction Act including the subsidies for green energy. Earnings for solar companies could take a big hit as a result.
It’s too early to say what exactly will get cut to reach an ultimate compromise. But there’s a good chance that green energy will pay part of the price for a deal. And apart from the subsidies, there’s little to justify First Solar’s current share price. FSLR stock is selling for 28 times forward earnings. That’s rather high in any case and doubly so if the government subsidies are slashed for the sector.
Construction Partners (ROAD)
Construction Partners (NASDAQ:ROAD) is an infrastructure company. It builds and maintains roads, bridges, airports and commercial and residential developments, primarily in the southeastern United States.
Historically, the company has generated the majority of its revenues from the public sector. Some analysts pointed to it as a winner from President Biden’s infrastructure plan. As such, it is now at risk if that more generous posture toward infrastructure spending is rolled back.
And, like First Solar, there’s not a lot of fundamental value underpinning ROAD stock. Shares are currently going for a surprising 40x this year’s estimated earnings. If anything goes wrong with the debt ceiling negotiations or the economy more broadly, Construction Partners could see its shares tumble.
L3Harris Technologies (LHX)
L3Harris Technologies (NYSE:LHX) is a leading defense contractor. While the company has had great success historically, it finds itself in the potential crossfire of the current government spending standoff.
That’s because around 60% of L3Harris’ revenues come from the Department of Defense. That makes the company quite vulnerable to any potential cuts in defense spending that may come about in a debt ceiling agreement. For past reference, the 2011 deal created budget sequestration, which ultimately caused nearly $500 billion in defense spending cuts over a decade.
To be fair, this risk applies to most defense contractors. However, many firms such as Boeing (NYSE:BA) are more diversified and have large commercial businesses in addition to their defense operations. L3Harris, with its more government-driven spending mix is at high risk if the overall sector faces meaningful spending cuts.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.