On Thursday, Nov 16, the House of Representatives finally passed the tax cut legislation, now named the Tax Cuts and Jobs Act. This has taken President Donald Trump and his team a step closer toward realizing their most important agenda — tax reforms.
Big banks and tech companies will emerge as winners if tax reforms are implemented. Banks would benefit from a slash in taxes because such a development actually boosts investments. On the other hand, tech companies would gain from Trump’s one-time tax repatriation. Tech companies can use this extra cash for research and development, as well as mergers and acquisitions.
House Passes Tax Bill
Members of the GOP remained positive about the how the Bill would actually improve the overall economy. House Speaker, Paul Ryan even commented that the legislation would result in more jobs, increased wages and above all, higher take-home pay. The Bill reduces the corporate tax rate to 20% from the current 35%.
It also reduces tax brackets to just four slabs from the current seven and revokes the estate tax system. Eventually, the United States will move to a territorial tax system, under which a company can be taxed only when there is any income. (Read More)
GOP Might Consider Dropping the Mandate Repeal Facet
Members of the GOP have thus far been unsuccessful in pushing through the tax reforms. Additionally, the Trump administration has failed to repeal Obamacare on numerous occasions. In a latest development, Budget director, Mick Mulvaney announced that Republicans were willing to drop the mandate repeal if it acts as a roadblock in the passing of the Bill.
Mulvaney also added that members of the GOP did not see repealing of the mandate as an impediment. Further, Republicans, particularly, Senator Lisa Murkowski commented that if the individual mandate of Obamacare is actually revoked, it would give citizens more freedom of choice. For the time being, however, it is clear that the Republicans want the Bill to be signed into law even if it means not touching Obamacare.
Meanwhile, Trump commented that he was “proud of the Rep. House & Senate for working so hard on cutting taxes” and that the Republicans should now focus on repealing “the unfair & highly unpopular Indiv Mandate” of Obamacare.
Gainers of Tax Reforms
After the House passed the tax bill, small-cap stocks surged. After all, such companies have been paying more than 30% taxes 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 overseas. In contrast, large-cap companies typically generate more than 30% of their sales 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.
Moreover, banks face a high tax burden, which makes them big gainers when tax rates go down. As per KBW estimates, JPMorgan Chase & Co. (JPM) , Wells Fargo & Co (WFC) and Bank of America Corp (BAC) 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 boost the economy and lead to a liftoff. 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), Alphabet (GOOGL), Microsoft (MSFT), Cisco Systems (CSCO) and Oracle (ORCL) 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. (Read More)
5 Top Picks
We have highlighted four mutual funds which would benefit from tax reforms. These mutual funds sport a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy). Moreover, these funds have encouraging third-quarter and YTD returns. Additionally, the minimum initial investment is within $5000 and net assets are above $50 million.
Small-caps, banks and tech behemoths are poised to gain extensively from Trump’s tax reforms. Small-cap companies are largely domestic focused and face appreciably higher corporate tax rates.
Therefore any tax cut significantly benefits small-cap companies. Moreover, Trump’s one-time tax repatriation would help the big shots that are hoarding their money in foreign shores to get it back to the United States.
We expect these funds to outperform their peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but also on the likely future success of the fund.
Fidelity Advisor Technology I (FATIX - Free Report) seeks appreciation of capital in the long run. FATIX invests the lion's shares of its assets in common stocks and securities of companies involved in developing and offering products and services which would, in the future, benefit a great deal from technological developments.
FATIX has an annual expense ratio of 0.77%, which is below the category average of 1.42%. The fund has three-year and YTD returns of 23.2% and 54.3%, respectively.
Fidelity Advisor Financial Services I (FFSIX - Free Report) seeks growth of capital and invests primarily in common stocks. It invests the lion’s share of its assets in securities of companies which provide financial and related services to both consumers as well as the industry. FFSIX invests both in U.S. as well as non-U.S. companies.
FFSIX has an annual expense ratio of 0.83%, which is below the category average of 1.47%. The fund has three-year and YTD returns of a respective 9.8% and 13.7%.
AB Discovery Value Advisor (ABYSX - Free Report) invests the lion’s share of its assets in equity securities of various small- and mid-cap companies, which are included on the Russell 2500(R) Value Index. ABYSX seeks appreciation of capital for the long run.
ABYSX has an annual expense ratio of 0.89%, which is below the category average of 1.11%. The fund has three-year and YTD returns of 8.9% and almost 8%, respectively.
Bridgeway Small-Cap Growth (BRSGX - Free Report) seeks total returns through capital growth over the long run. BRSGX maintains a diversified portfolio by investing a large share of its assets in small-cap companies, having an impressive growth prospect. BRSGX invests in companies that are listed on the NYSE, NYSE MKT and NASDAQ.
BRSGX has an annual expense ratio of 0.94%, which is below the category average of 1.27%. The fund has three-year and YTD returns of 12.7% and 16.1%, respectively.
Want key mutual fund info delivered straight to your inbox?
Zacks' free Fund Newsletter will brief you on top news and analysis, as well as top-performing mutual funds, each week. Get it free >>