Investing in your highest-conviction ideas can help your portfolio to generate differentiated returns. However, investing based on your political convictions is often a recipe for disaster, especially when emotions and partisan rhetoric run high during election season.

In the run-up to President Barack Obama’s inauguration, some investors fretted that the stock market would suffer during his term in office or piled into renewable-energy stocks and avoided oil and gas companies.

But Obama’s term in office has proved a very good time to own stocks. Renewable-energy companies have also struggled because of challenging business models and fundamentals, while US crude-oil and natural-gas output has soared.

Investors who focused on politics instead of industry fundamentals missed out on these opportunities or came late to the party. Utility stocks have participated in the rally, nearly tripling in value.

Attributing the strong rally in equities to President Obama would be just as fallacious as laying the utility sector’s post-Enron implosion in the early 2000s at the feet of President George W. Bush. In both instances, market factors drove these results, not politics.

That being said, elections can have important implications for utility stocks, which is why we make a point of previewing what’s at stake in the presidential and key gubernatorial elections.

For example, President George H.W. Bush’s Clean Air Act gave regulated electric utilities a huge opportunity to grow their earnings by recouping the required system investments in their rate base.

And although a court challenge has delayed the implementation of the Environmental Protection Agency’s Clean Power Plan, these rules would likewise encourage the industry to invest in grid infrastructure, renewable energy and gas-fired power plants—a significant opportunity for regulated electric utilities to grow their earnings.

Bottom Line: Any policy that stimulates incremental system investment will benefit electric utilities.

Federal Elections: What’s at Stake