Congress’s nonpartisan scorekeeper in tax matters, the Joint Committee on Taxation, declared that the House Republicans passed an overhaul of the U.S. tax code that slashes corporate tax rates on Thursday.
Big banks will benefit immensely from the tax cut as this will likely bolster investments. Lower tax rates also drive after-tax earnings for tech behemoths as it leads to repatriation of trillions of dollars held abroad by such companies. Tech companies can use this extra cash for research and development, as well as mergers and acquisitions.
Small-cap companies are poised to gain enormously as well, mostly because they have been paying more taxes than their counterparts. Thus, investors should focus on multinational financial and technology service providers, as well as small-cap players, that can make the most of the slashed corporate tax rate.
Senate Passes Tax Bill
House Republicans approved a monumental bill to enact $1.5 trillion in tax cuts for businesses and individuals. The bill cleared the House 227-205, without Democratic support. The Democrats believed that it is a give-away to the wealthiest Americans. 13 Republicans representing districts with an already high average state and local tax deduction also voted against the bill.
Such a high tax deduction will be scaled back significantly under the House plan. Nevertheless, the Joint Committee on Taxation said that around 92% of Americans will pay less or the same taxes until 2023 under the new plan.
Republicans, in the meantime, have been rooting for a change in tax codes for several years but have repeatedly failed to garner support in the House until Trump’s election. Trump said that such a bill is a “big, beautiful Christmas present” for families, while the White House press secretary said that “a simple, fair, and competitive tax code will be rocket fuel for our economy, and it's within our reach.”
This has set the stage for Republicans to execute their ‘once-in-a-generation’ opportunity to overhaul an outdated U.S. tax code, providing financial relief to families and making American businesses more competitive globally.
Great for Banks & Tech Companies
The bill trims the corporate tax rate from 35% to 20%, making it the biggest one-time drop in big business tax rates ever.
Banks face a high tax burden, which makes them big gainers when tax rates go down. As per KBW estimates, JPMorgan Chase & Co. (JPM - Free Report) , Wells Fargo & Co (WFC - Free Report) and Bank of America Corp (BAC - Free Report) will enjoy a 20% or more hike in profits if the corporate tax rate is cut to 20%.
Lower domestic tax rates will also result in repatriation of hundreds of billions of dollars in cash. This could help boost the economy and may cause interest rates to rise. Higher interest rates boost bank profits by increasing the spread between what banks earn by funding longer-term assets, such as loans, with shorter-term liabilities.
Let us also not forget that tech behemoths Apple Inc. (AAPL - Free Report) , Alphabet (GOOGL - Free Report) , Microsoft (MSFT - Free Report) , Cisco Systems (CSCO - Free Report) and Oracle (ORCL - Free Report) hold 88% of their money overseas to avoid paying the 35% corporate tax rate on earnings. Thus, they are positioned to gain immensely under Trump’s tax reduction plan.
Small Caps Rally on House Vote
After the House passed the tax bill, small-cap stocks surged. After all, such companies have been paying taxes of more than 30% for quite some time, while their large-cap counterparts are paying close to 25%.
Moreover, Trump’s call for more protectionism and less global trade boosted small caps that mostly generate less than 20% of its revenues from overseas. In contrast, large-cap companies typically generate more than 30% of their sales from abroad.
The Russell 2000 Index, which comprises the smallest companies in terms of market capitalization, is up more than 27% since Trump was elected, while the S&P Small Cap 600 Index climbed more than 25% since the close of trading on Nov 8.
Top 5 Winners
Investors should double down on the hottest banking and tech bigwigs, as well as solid companies with smaller market capitalizations. We have, therefore, selected five relevant companies that flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy).
Eagle Bancorp, Inc. (EGBN - Free Report) operates as the bank holding company for EagleBank that provides commercial and consumer banking services, primarily in the United States. Currently, the company has a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for its current-year earnings rose 1.5% over the last 60 days.
Eagle Bancorp’s expected growth rate for the current year is 15.3%, better than the industry’s expected gain of 10.1%. The company is also poised to grow its earnings by 8.5% in 2018.
DXC Technology Company DXC provides information technology services and solutions, primarily in North America, Europe, Asia and Australia. The company sports a Zacks Rank #1 (Strong Buy). The Zacks Consensus Estimate for its current-year earnings has gained 8.2% in the last 60 days.
DXC Technology’s expected growth rate for the current year is 138.3%, way higher than the industry’s expected gain of 4.2%. Additionally, the stock is anticipated to advance its earnings by 16.1% in the next year.
Adobe Systems Incorporated (ADBE - Free Report) operates as a diversified software company worldwide. The stock has a Zacks Rank #1 (Strong Buy). The Zacks Consensus Estimate for its current-year earnings grew by 3.9% over the last 60 days.
Adobe Systems’ projected growth rate for the current year is 39.4%, better than the industry’s projected gain of 10.2%. The company is set to grow its earnings by a further 30.5% in 2018. You can see the complete list of today’s Zacks #1 Rank stocks here.
Craft Brew Alliance, Inc. (BREW - Free Report) brews and sells craft beers and ciders under the Kona, Widmer Brothers, Redhook, Omission, and Square Mile brand names in the United States. Currently, the stock has a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for its current-year earnings advanced 3.9% in the last 60 days.
Craft Brew Alliance’s expected growth rate for the current year is 450%, way higher than the industry’s estimated rally of 12.2%. Also, the company is expected to expand its earnings by 27.3% next year.
Boot Barn Holdings, Inc. (BOOT - Free Report) – a Zacks Rank #2 (Buy) company – is a lifestyle retail chain and operates specialty retail stores in the United States. The Zacks Consensus Estimate for its current-year earnings climbed 7% over the last 60 days.
Boot Barn’s projected growth rate for the current year is 10.6%, in contrast to the industry’s projected decline of 3.8%. The company's earnings are also set to grow by 20.4% in 2018.
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