The #TrumpTax Strategy No One’s Talking About
Well, tax reform is finally here.
The framework for the largest tax overhaul in 30 years is nicely in place.
Now let’s make sure your portfolio is ready.
America’s biggest multinational corporations, like Apple, have long since been enjoying tax loopholes. That is, by extending their operations abroad.
But the little guys — microcaps with market capitalizations of less than $2 billion — have been left out in the cold for decades.
Trump’s new tax initiative levels the playing field for smaller firms.
As such, I’m predicting that the big multinationals will go on a historic buying frenzy.
My rationale is very straightforward…
Instead of being challenged by companies trading for pennies — a distinct possibility under Trump’s new tax plan — multinationals will simply buy them. Problem solved!
I like to call these tiny takeover targets “chartbreakers.” Because when buyouts are made public, the announcement always “breaks” their charts.
(The next chart to “break” could put upward of $100,048 into your pocket.)
Below are the three industries with the most “deal grease.”
Massive Earnings Boost on the Way
More than a decade has passed since the financial crisis. But banks in America still struggle to get any love… from consumers or the markets.
Consumers have decried lending practices, service fees and cross-selling across the board.
Investment banks have also come under fire for aggressive, risky trades made with heavy leverage.
Worst of all, record-low interest rates have held down profitability, putting significant pressure on financial shares.
But despite the bad press, strict legislation enacted after the Great Recession has made banks safer than they’ve been in decades.
And Trump’s tax plan could unleash a torrent of profits in financial shares — which already trade at a significant discount to the market.
This is especially true for small-cap financial shares.
Let me explain…
The U.S. federal corporate tax rate currently stands at 35% — the highest among the major countries of the world.
According to Thomson Reuters data, companies in the large-cap S&P 500 index — many of which are multinational firms — pay a median effective tax rate of 28%.
On the other hand, the average tax rate for a company in the small-cap Russell 2000 index is 32%. As you may know, the majority of small-cap companies derive their revenue here in the U.S.
According to data from NYU professor Aswath Damodaran, the effective tax rate for the financial industry is about 32%.
Keep that last number in mind…
WisdomTree Investments Inc. (NASDAQ: WETF) is one of the world’s largest asset management companies, specializing in ETFs.
But with a market cap of $1.8 billion, it’s tiny compared with the rest of the industry.
Here’s where things really get interesting…
As of 2016, it paid an effective tax rate of 53% — nearly twice the rate of financials and small caps.
After taxes, WisdomTree earned $0.19 per share for the year.
All else being equal, the company would have earned a whopping $0.35 per share at a tax rate of 15% — which is what Trump is said to be aiming for.
That’s an increase of almost double.
Bottom line: If Trump’s tax reform goes through, you’ll want to own financials. And because they’re still “hated” by the market, now’s your chance to pick them up on the cheap.
And remember, if any of these companies is targeted for acquisition, 100% of the time the stock goes UP. Click here for details on our favorite takeover target right now.
Taking Aim at Retail
The principal gainers from the Trump administration’s corporate tax rate reduction will be companies that currently pay taxes at around the current nominal rate of 35% — and have few exemptions for capital investments and few operations overseas.
The largest group of these are retailers.
Even Walmart (NYSE: WMT) paid over 30% tax on its income in the year to January 2017.
While a smaller, more domestic retailer like Lowe’s Cos. Inc. (NYSE: LOW) paid almost 41%, higher than the nominal federal rate because of state taxes.
So if the tax rate drops to 20% (which was the original GOP plan), retailers’ net income can thus be expected to increase by 20–25%. That is, because they get to keep 80% rather than 65% of their income.
This makes them attractive acquisition targets — either for online retailers like Amazon.com (NASDAQ: AMZN) or for other manufacturers of consumer-oriented products.
The goal would be to capture lower-taxed retailing dollars through forward integration.
Apple Inc. (NASDAQ: AAPL) has already shown the business benefits of a “shopfront” for its product line. The after-tax profitability of that shopfront will now substantially increase.
Automobile manufacturers, for example, have traditionally sold through independent dealerships. But they might aim to acquire dealership chains and capture the retail margin.
Publicly quoted dealer chains such as AutoNation Inc. (NYSE: AN), which paid tax at 38% in 2016, would thus be attractive targets.
Similarly, health care groups might scoop up newly profitable drugstore chains like CVS Health Corp. (NYSE: CVS), which paid a 38% tax rate in 2016.
Throughout the retail sector, attractive bargains are easy to spot. And with big companies flush with cash, a flurry of takeover deals is imminent. (Find out why we call these opportunities “chartbreakers” by clicking here now.)
Head to the Oil Patch
Get ready for another great energy resurgence!
It’s not because the largest oil and gas companies have billions upon billions parked in cash overseas simply waiting to be repatriated.
The data shows the opposite, in fact. While technology and health care companies account for about 85% of the untaxed cash overseas, energy and financial companies only account for about 2%.
Instead, the boom will come thanks to two key components of President Trump’s proposed tax plan:
- Slashing the corporate tax rate to 20%. This means dramatically lower taxes and in turn, higher profits for U.S.-based oil companies with global operations. And if Trump’s wish for a 15% tax rate is granted, even better!
- Immediate expensing of capital. This provision should free up gobs of cash to reinvest in new projects (i.e., growth).
Always a forward-looking beast, the market is already starting to price in the energy resurgence, too.
Heading into September, the energy sector was the market’s worst-performing sector — down a painful 16.75%.
But boy, what a difference a month makes!
Energy finished September in the lead, rallying 9.16% during the month. And I’m not surprised, either, as energy stocks were completely oversold relative to their intrinsic value.
Energy Sector Rallies Ahead of Tax Reform
Here’s the key: With oil prices above the key psychological level of $50, the stage is set for the fundamental rally to continue.
Or as Tom Lee of Fundstrat Global Advisors told CNBC, “By definition, ‘value’ is equity cheap relative to intrinsic value, and energy stocks are the poster child, especially if oil is recovering.”
Tax reforms only promise to accelerate the rotation into energy stocks. As for the best way to play it? Think small to win big!
As industry insider and billionaire T. Boone Pickens has famously observed, it’s easier to drill for oil on Wall Street than in the ground.
With all the extra cash destined to hit large-company coffers, thanks to tax reforms — combined with the still-depressed relative valuations in the sector — I expect a boom in takeover activity.
As I said before, I like to call these tiny takeover targets “chartbreakers.” Because when buyouts are made public, the announcement always “breaks” their charts.
The next one in the energy sector could put upwards of $100,048 into your pocket. Don’t miss out!
Ahead of the tape,
Chief Investment Strategist, Wall Street Daily