How to Beat the S&P 500 in 2014

Most money managers are happy when they can figure out how to beat the S&P 500 for two consecutive years. But we've discovered one investment that has crushed the S&P Index for 12 consecutive years.

And it's set to outperform broad markets again in 2014.

The correlation between this strategy and investor returns is just too powerful to simplify or dismiss.

We're not talking about a strategy that's commonly talked about. This one is more controversial than others. But it truly "follows the money."

Here's how it works.

How to Beat the S&P 500 with the Strategas Lobbying Index

To find these market-beating returns, you have to start in Washington, D.C.

In a nation where free-market capitalism is on life support, companies recognize the best way to profit is to invest directly into the best Congress that money can buy. Spending on lobbying more than doubled between 2001 and 2012, from $1.65 billion to $3.31 billion.

For that level of investment, companies naturally want a strong return.

That's why Strategas Research Partners created a Lobbying Index to measure how much return companies earn when they put money to work in Washington.

The results are staggering; the return on investment (ROI) is completely off the charts.

Strategas' Lobbying Index tracks 50 companies impacted by government decisions, and they discovered the more money spent to effect change in regulators' decisions, the higher returns have been. For every $1 in lobbying spent, companies earned a whopping $220.

The Lobbying Index has now beaten the S&P 500 for 12 years in a row, with companies' shares outperforming in double-digit territory. According to The Economist, the index has outperformed the S&P 500 by 11% a year since 2002.

And Strategas isn't the only investment research company paying attention to this startling - and profitable - trend.

Motif Investment also tracks 20 stocks in an index called the "Kings of K Street." The index comprises 20 companies in four sectors: industrials & transportation, healthcare, energy & utilities, and technology & media.

Eighteen of the 20 stocks are up over the last year, including 17 double-digit returns.

It seems these companies are bringing a new meaning to the term "political capital."

This Trend Isn't Going Away

So which companies stand to profit from this strategy?

These 50 big spenders naturally include large defense contractors like Raytheon Co. (NYSE: RTN), which require direct government investment in the public sector military complex. The last 12 years have also seen significant growth for companies in heavily regulated industries like financial services, pharmaceuticals, and healthcare.

The index's top five spenders currently are 3M Co (NYSE: MMM), Accenture Plc (NYSE: ACN), Alexion Pharmaceuticals Inc. (Nasdaq: ALXN), Altria Group Inc. (NYSE: MO), and Brown-Forman Corp. (NYSE: BF.B).

And with a return on investment of 220-1, don't expect financial reform to stop the flow of dollars into the coffers of Washington's elite. That means more money spent on lobbying and more emphasis on political intelligence to understand what companies are paying and, more important, why.

For example, let's take a look at one of our favorite companies, Cheniere Energy Inc.  (NYSE: LNG). The company is part of Motif's "Kings of K Street" index.

The firm is an owner and operator of natural gas pipelines and liquefied natural gas receiving terminals across the United States. Cheniere will be the first company to begin exporting natural gas to global markets in 2015.

Now, certainly Cheniere was able to export natural gas on its own terms and has the operational capacity to be successful. But greasing the skids and ensuring that Washington remains open to natural gas exports requires a lot of money.

From 2004 to 2010, the company spent less than $500,000 each year on lobbying expenses. But as the natural gas export market began to form in 2011, the company ramped up its spending. In 2012, Cheneire spent more than $1 million for the first time on lobbying expenses.

In 2013, that figure more than doubled to $2.63 million.

Meanwhile, the company's stock has soared since it ramped up its lobbying efforts. The company's stock in October 2011 sat at $4. On Friday, the stock closed at $49.43, and it has increased by more than 100% since the beginning of 2013.

With that sort of return, it's not surprising that other companies are ramping up their lobbying spending in 2014.

And for investors, this has been one of the most successful ways to beat the S&P 500 - for 12 years running.

Stay tuned to Money Morning in 2014 for more detailed looks at who's spending what in Washington to get their way - and to see bigger stock returns.

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About the Author

Garrett Baldwin is a globally recognized research economist, financial writer, consultant, and political risk analyst with decades of trading experience and degrees in economics, cybersecurity, and business from Johns Hopkins, Purdue, Indiana University, and Northwestern.

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